INTERNATIONAL MARKETING

INTERNATIONAL MARKETING (MBA)

COURSE OVERVIEW

Today the corporate world cannot survive with restricting themselves within the domestic boundaries. As the consumers across countries become more universal in nature, the need to look at the whole world as a market is growing. The aim of this unit is to introduce the students to International Marketing, which explains how International Markets operate in an International Environment. An elementary approach is used in the module, which emphasizes the reasons for undertaking International Market analysis and their interpretation. An

international perspective is maintained throughout the text. The objective of the problems is to enhance the student’s understanding of analytical techniques- more emphasis on policy and managerial implications of International Marketing. The module focuses on International skills required to be an effective manager. It will develop the student’s ability to identify and appreciate effective ways of getting the objective fulfilled. It also develops practical applications ability and knowledge and how these can be used in the decision-making process.

Reference Books 1. International Marketing: Warren Keegan 2. Strategic Planning for Export Marketing: Warnklin R. Root 3. International Trade And Investment: Framklin R. Root 4. International Marketing Management: Philip Kotler 5. International Marketing: Philip R.Cateora & John L. Graham 6. International Marketing, Analysis & Strategy: Sak Onkvisit & John J. Shaw 7. International Marketing: Vern Terpstra & Ravi Sarathy

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INTERNATIONAL MARKETING

SYLLABUS

Unit: International Marketing
Unit value : Unit level : S 3 Unit code :

Description of unit
The aim of this unit is to introduce the students to International Marketing, which explains how International Markets operate in an International Environment. An elementary approach is used in the module, which emphasizes the reasons for undertaking International Market analysis and their interpretation. An international perspective is maintained throughout the text. . The objective of the problems is to enhance the student’s understanding of analytical techniques- more emphasis on policy and managerial implications of International Marketing. The module focuses on International skills required to be an effective manager. It will develop the student’s ability to identify and appreciate effective ways of getting the objective fulfilled. It also develops practical applications ability and knowledge and how these can be used in the decisionmaking process.

Detailed Course Contents
1. Introduction Introduction to International Marketing: Understanding international marketing, applicability, benefits, driving & restraining forces Types of Environment: International environment, domestic environment, foreign environment Orientations to International Marketing: Ethnocenric orientation, regiocenric orientation, geocentric orientation, polycentric orientation 2. Global Marketing Environment The Global Economic Environment Economic systems, stages of market development, WTO, regional economic organizations, international trade theory Social and Cultural Environment Basic aspects of society and culture, analytical approaches, business customs & ethics based on culture Political, Legal, Regulatory Environments Political environment, legal environment & problems, patents and trademarks 3. Analyzing And Targeting Global Opportunities Marketing Information Systems and Research Overview, sources of market information, formal marketing research, current issues, international marketing intelligence Segmentation, Targeting and Positioning Global market segmentation, global targeting, product positioning

Summary of Outcomes
To achieve this unit a student must:

• Identify and understand the nature and scope of
International Marketing

• Understand the various environments that influence
international marketing decisions

• Identify the opportunities that exist in global scenario and
target the customers

• Decide upon the global marketing strategy that should be
adopted

• Formulation of the global marketing programs and the
factors influencing the decision

• Managing the global marketing programs

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4. Global Marketing Strategy Entry and Expansion Strategies Decision criteria, exporting, and additional alternatives, marketing strategy alternatives. Cooperative Strategies and Strategic Partnerships Nature of global partnerships, alliances, partnerships in developing countries. Competitive Analysis and Strategy Michael Porter’s model, competitive advantage, strategic models, strategic positions & intent, competitive innovation
5. Global Marketing Programs

Distribution Decisions Types of intermediaries, channel development and decisions, determinants of channel types, packing and documentation Promotion Strategies-advertising Advertising, selecting the agency and content, media and standardized advertising, advertising appeals Promotion Strategies-public Relations, Personal Selling, Sales Promotion Public relations and publicity, personal selling, sales promotion, direct marketing, trade shows, sponsorship 6. Managing Global Programs Leading, Organizing, and Monitoring Leadership, organization types, management audit The Future of Global Marketing Major changes, careers in global marketing, financial environment, foreign exchange market Negotiations With Partners and Customers Impact of culture, implication for managers Sources of Financing Non-financial institutions, financial institutions, government agencies, international bodies Outcomes and Assessment Criteria

INTERNATIONAL MARKETING

Product Decisions Basic concepts, product positioning, design considerations, geographic expansion, new product, branding decisions, packaging decisions, international product lifecycle, and marketing of services. Pricing Decisions Environmental influences, pricing strategies, gray markets and dumping, transfer pricing, global pricing.

Outcomes

Assessment criteria
To achieve each outcome a student must demonstrate the ability to:

1. Identify and understand the nature and scope of International Marketing 2. Understand the various environments that influence international marketing decisions

• • • • •

Understand the determinants of International Marketing Understand the dimensions of International Markets Understand the difference between standardization and adaptation Understand the factors encouraging the standardized products Internationally Analyze the importance of political, environment, cultural environment Understanding the global customers Analyzing the global marketing information systems and research The strategy of segmenting, targeting and positioning with the international customer Understand the decision criteria for entering International Market Understanding the global strategic partnerships Analyze the competitive structure available and strategy that can be applied The factors to be considered during product decisions The branding decisions and the packaging requirements The factors to know in pricing decisions The channels of distribution Evaluating International advertising availability and promotional campaigns. Leading, organizing and monitoring the global marketing efforts The future of global marketing in the financial environment.

3. Identify the opportunities that exist in global scenario and target the customers 4. Decide upon the global marketing strategy that should be adopted

• • • • • • • • • • •

5. Formulation of the global marketing programs and the factors influencing the decision

6. Managing the global marketing programs

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Generating Evidence Evidence of outcomes may be in the form of written or oral assignment and tests. The assignment may focus real problems or case studies. Learning and assessment can be across units, at unit level or at outcome level. Evidence could be at outcome level although opportunities exist for covering more than one outcome in an assignment. Links The unit is intended to give an understanding between international business and the various variables affecting it. The unit links with all core units like international business management, export management and policy framework for global economy. The unit offers opportunities for demonstrating common skills for managing tasks and solving problems. Resources Various newspapers like The Economic Times, magazines and journals like The Economist are the sources of information, which will be useful for the unit. Websites can be useful for providing information and case studies appropriate for educational purposes. Suggested Readings 1. International Marketing: Warren Keegan (Pearson Education) 2. Strategic Planning for Export Marketing: Warnklin R. Root 3. International Trade And Investment: Framklin R. Root 4. International Marketing Management: Philip Kotler 5. International Marketing: Philip R.Cateora & John L. Graham 6. International Marketing (Analysis & Strategy): Sak Onkvisit & John J Shaw (Pearson Education) 7. International Marketing: Vern Terpstra & Ravi Sarathy Delivery This unit will probably be delivered as a stand-alone unit, but there are opportunities for some integration of assignment with the units identified above.

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INTERNATIONAL MARKETING

RBS

INTERNATIONAL MARKETING (MBA)

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CONTENT
Unit No. Lesson No. Topic Lesson Plan Course Requirments 1 Lesson 1 Lesson 2 2 Lesson 3 Lesson 4 Lesson 5 Lesson 6 Lesson 7 Lesson 8 Lesson 9 Lesson 10 Introduction to International Marketing Introduction to International Marketing-2 Economic Environment-The World Economy Economic Environment- Foreign Economies International Trade Theory Political Environment Legal Environment Social & Cultural Environment Business Customs in Global Marketing Business Ethics and Bribery Tutorial A Trade Distortions and Marketing Barriers Case 1 : Selling U.s. Ice Cream In Korea Case 2 : Unilever And Nestle-an Analysis Case 3 : Nestle-the Infant Formula Incident Euro Disney (A) Euro Disney (B) 3 Lesson 11 Lesson 12 Lesson 13 Global Marketing Information Systems and Research International Marketing Intelligence Segmentation, Targeting and Positioning Tutorial C : Swatch Watch U.s.a.: Creative Marketing Strategy Oriflame 4 Lesson 14 Lesson 15 Lesson 16 Lesson 17 Lesson 18 Entry and Expansion Strategies: Marketing and Sourcing Planning Process & Entry Strategies Cooperative Strategies and Global Strategic Partnerships Competitive Analysis and Strategy Strategic Positioning and Intent Case 1 : Metro Corporation : Technology Licensing Negotiation Case 2: Ascom Hasler Mailing Systems Inc. : Competing in the Shadow of a Giant Case Study : Kodak Versus Fuji
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CONTENT
Unit No. 5 Lesson No. Lesson 19 Lesson 20 Lesson 21 Lesson 22 Lesson 23 Lesson 24 Lesson 25 Lesson 26 Lesson 27 Lesson 28 Lesson 29 Lesson 30 Lesson 31 Lesson 32 Lesson 33 Lesson 34 Lesson 35 Lesson 36 Topic Product Decisions International Product Strategies Moving Toward World Product Branding Decisions Branding and Packaging Decisions Marketing Industrial Products Nternational Marketing of Services Basic Pricing Concepts Dumping & Countertrade Transfer Pricing and Other Pricing Approaches Global Advertising Advertising School of Thoughts Global Promotion Channels of Distribution Channel Development & Adaptation A Guide for Developing a Marketing Plan Physical Distribution & Documentation Global E-Marketing Case Study 1 : Baseball : The Japanese Game Case Study 2 : Sony Corp Case Study 3 : Sony in 1996 Case Study 4 : Enron: supplying Electric Power in India 6 Lesson 37 Lesson 38 Lesson 39 Lesson 40 Lesson 41 Sources of Financing and International Money Markets Negotiating with International Customers, Partners and Regulators Implication of Negotiations Differences for Managers Leading, Organizing, and Monitoring the Global Marketing Effort The Future of Global Marketing Case Study : Parker Pen Co. (A) Parker Pen Co. (B) Parker Pen Co. (C) CEAC-China Nokia and the Cellular Phone Industry 374 383 388 391 394 395 408 361 366 Page No. 193 201 210 218 226 234 239 247 255 264 271 278 285 292 302 309 315 326 341 343 345 348 351

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RAI UNIVERSITY RAI BUSINESS SCHOOL

INTERNATIONAL MARKETING

LESSON PLAN
Program: MBA Session Year 2 Semester 3

Subject Title : International Marketing
Number of Hours Daily Lesson Schedule with dates Name of the topic as given in RU Syllabus L O Ass ignt Reference Title Name of the Book & Author Page no. Remarks

L*

T *

P*

G S D

T T L

1 Global marketing mgmt, Warren Keegan P 1-14 International Marketing, Onkvisit & Shaw P 21-31

Lesson 1

Introduction to international marketing, Orientations of mgmt,

1

1

Lesson 2

Types of environments, Driving and restraining forces principles of a marketing co.

1

1

Global marketing mgmt, Warren Keegan P 15-20

Lesson 3

Tutorial & Presentation

1

1

1

Global marketing mgmt, Warren Keegan P 22 International Marketing, Onkvisit & Shaw P-33 Global marketing mgmt, Warren Keegan P 32-50 Global marketing mgmt, Warren Keegan P 51-64 International Marketing, Terpstra & Sarathy P 38-59
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2 Lesson 4 Economic systems, stages of development WTO, regional economic organizations International Trade Theory 2 1 1

Lesson 5

2

1

Lesson 6

2

1
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INTERNATIONAL MARKETING

Number of Hours Daily Lesson Schedule with dates Name of the topic as given in RU Syllabus L O Ass ignt

Reference Title Name of the Book & Author Page no.

Remarks

L*

T *

P*

G S D

T T L

3 Global marketing mgmt, Warren Keegan P 67-88, International Marketing, Cateora & Graham, P 85-99 International Marketing, Onvisit & Shaw, P 209-240 International Marketing, Cateora & Graham, P 115133 International Marketing, Cateora & Graham, P 133139

Lesson 7

Basic aspects of society and culture Analytical approaches

2

1

1

Lesson 8

Business Customs

2

1

Lesson 9 4 Lesson 10

Business ethics and their implication for managers Tutorial on environment Political environment, types of government, political risks

2

1

1

1, 2

1 Global marketing mgmt, Warren Keegan P 91-96, International Marketing, Onvisit & Shaw, P 135-165 Global marketing mgmt, Warren Keegan P 96-112, International Marketing, Onvisit & Shaw, P 169-200 Global marketing mgmt, Warren Keegan P 165-172 Global marketing mgmt, Warren Keegan P 173-184, Global marketing mgmt, Warren Keegan P 184-188, International Marketing, Terpstra & Sarathy P 212-242

Lesson 11

2

1

Lesson 12

Legal environment, patents and trademarks

2

1

1

5 Lesson 13 Overview, sources of market information Formal marketing research 3 1

Lesson 14

3

1

1

Lesson 15

International Marketing Intelligence

3

1

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625. sourcing Additional alternatives. strategic positions. Warren Keegan P 192-204 Global marketing mgmt. Warren Keegan P 262-274 Global marketing mgmt. Warren Keegan P 229-244 Global marketing mgmt. Design considerations. Warren Keegan P 244-258 Global marketing mgmt. Warren Keegan P 219-227 1 Lesson 17 Lesson 18 7 3 3 1 1 Lesson 19 Decision criteria for international business. Global targeting. product positioning. competitive innovation Tutorial & presentations Tutorial & presentations Tutorial on global marketing opportunities & strategies Basic concepts.2 © Copy Right: Rai University . entry strategies 4 1 Lesson 20 4 1 Lesson 21 8 Lesson 22 Cooperative strategies 4 1 1 Global marketing mgmt.INTERNATIONAL MARKETING Number of Hours Daily Lesson Schedule with dates Name of the topic as given in RU Syllabus L O Ass ignt T T L Reference Title Name of the Book & Author Page no. alliances 4 1 Lesson 23 Tutorial & Presentation Strategic models. geographic expansion International Product lifecycle. Warren Keegan P 277-302 Nature of global partnerships. Warren Keegan P 330-353 International Marketing. Coca-Cola Case Study 4 1 1 Lesson 24 9 Lesson 25 Lesson 26 Lesson 27 10 Lesson 28 4 1 4 4 4 1 1 1 1 Global marketing mgmt. Warren Keegan P 269-274 Global marketing mgmt. Warren Keegan P 262-74 Global marketing mgmt. Globalization of Product. product positioning Case study discussionSwatch watches Tutorial & Presentation 3 1 Global marketing mgmt. Onkvisit & Shaw P 385-405 ix 5 1 Lesson 29 5 1 1 11. Remarks L* T * P* G S D 6 Lesson 16 Global market segmentation.

625. Onkvisit & Shaw P 423-455 International Marketing.INTERNATIONAL MARKETING x Number of Hours Daily Lesson Schedule with dates Name of the topic as given in RU Syllabus L O Ass ignt Reference Title Name of the Book & Author Page no. Warren Keegan P 407-425 International Marketing. P 378398 Global marketing mgmt.2 . Warren Keegan P 358-370 Global marketing mgmt. Warren Keegan P 373-380 International Marketing. Warren Keegan P 370-373 International Marketing. Advertising School of Thoughts 5 1 1 Lesson 36 Public relations and publicity. Onkvisit & Shaw P 584-599 Global marketing mgmt. Warren Keegan P 428-438 International Marketing. Cateora & Graham. 5 1 Lesson 33 Dumping and Countertrade 5 1 1 12 Lesson 34 Transfer pricing and other approaches 5 1 Lesson 35 Global Advertising. Onkvisit & Shaw P 635-643 Global marketing mgmt. Onkvisit & Shaw P 585-594 International Marketing. Onkvisit & Shaw P 616-622 Global marketing mgmt. Onkvisit & Shaw P 534-560 Lesson 31 Marketing of Industrial Products and Services 5 1 Lesson 32 Basic Pricing Strategies. Remarks L* T * P* G S D T T L Lesson 30 11 Branding and packaging decisions 5 1 1 International Marketing. personal selling 5 1 1 © Copy Right: Rai University 11.

INTERNATIONAL MARKETING Daily Lesson Schedule with dates Number of Hours Name of the topic as given in RU Syllabus L O Ass ignt T T L Reference Title Name of the Book & Author Page no. Warren Keegan P 385-404 International Marketing. Onkvisit & Shaw P 462-478 International Marketing.625. Cateora & Graham P 583595 International Marketing. Onkvisit & Shaw P 666-692 International Marketing. Onkvisit & Shaw P 478-496 International Marketing. Onkvisit & Shaw P 500-530 International Marketing. Warren Keegan P 509-530 1 Global marketing mgmt. Cateora & Graham P 595607 Global marketing mgmt.2 © Copy Right: Rai University xi . Remarks L * T * P* G D S 13 Global marketing mgmt. Warren Keegan P 440-457 Global marketing mgmt. organizing the global effort Tutorial on maketing programs and their management The Future of Global Marketing 6 Lesson 45 16 Lesson 46 6 6 11. Warren Keegan P 533-540 Lesson 37 Global E-marketing 5 1 Lesson 38 Channels of Distribution 5 1 Lesson 39 14 Lesson 40 Channels Development & Adaptation 5 1 1 Physical Distribution & Documentation 5 1 Lesson 41 Sources of Financing 6 1 Lesson 42 15 Lesson 43 Negotiations with international partners 6 1 1 Implication of culture for managers in negotiations 6 1 1 Lesson 44 Leading.

INTERNATIONAL MARKETING Number of Hours Daily Lesson Schedule with dates Name of the topic as given in RU Syllabus L O Ass ignt Reference Title Name of the Book & Author Page no.625.2 . Remarks L * T * P* G D S T T L Lesson 47 Revision of unit 1&2 1 & 2 3 & 4 5 6 Lesson 48 17 Lesson 49 Lesson 50 18 19 L* = Lesson Hours Revision of unit 3&4 Revision of unit 5 Revision of Unit 6 Preparatory Leave End term exams T* = Tutorials Hours P* = Practical/Studio Hours xii © Copy Right: Rai University 11.

correctness. Each student is expected to meet the attendance requirement of 75% in aggregate. b. The Syndicate accomplishes the assignment as under: a. Regularity to attend classes. analysis.625. g. Approach adopted to find solution to a given problem. The system of assignment follows the procedure given below: a. The team members shall get together to decide at the share of the work. Different assignment is given to different Syndicate. The students are expected to have gone through the pre-study material and come prepared for discussion. Ability to take criticism. Each student is required to make self and peer evaluation in accordance with a format. e. use of technology and application of statistical tools. All students of the syndicate are expected to submit the assignment individually. 11. e. d. The process is intended to identify the following aspects in a student: a. Integration of the inputs to an unified Syndicate solution Assignments Each student is expected to submit two assignments per subject during the semester.INTERNATIONAL MARKETING COURSE REQUIREMENTS Prerequisite : 11. which is integrated together to form the project. 553(MBA). Research on existing practices. c. ability to respond to queries. We visualize that the quantum and quality of learning through discussion would be much superior to simple delivery of the course material in the classroom. This is a confidential document between the students submitting the assignment and the faculty member. This helps in inculcating the culture of team work. Ability to present his point view systematically/logically. Syndicate It refers to the group of students who are assigned same tasks to be performed. highlighting their advantages and defects. b. c. Group Presentation Most professional courses train their students in developing presentation skills. Communication skills. xiii themselves as individuals and demonstrate their exceptional ability. The students may correct the error committed by them while submitting the assignment at the presentation stage. 11.151(BBA) Class Participation It forms the backbone of the system of Continuous evaluation. practicability. to gain significant knowledge. Statement of the problem / issues (correctness / quality). They shall be prepared to answer queries raised by the students as well as the faculty members. and their critical analysis. The evaluation is made on the basis of the project report and presentation. Students may furnish additional data/information downloaded from the Internet/other literature and put up diverse views away from to syndicate solution. Completion of the assigned job within the allocated time frame. The project report is evaluated for the following: a. Commitment to learning. Recommendation. Each member of the Syndicate is expected to participate equally to solve the given problem. they have the opportunity to express Group Project This activity is also aimed at developing the culture of teamwork. etc. Presentation. End Semester Examination These examinations are conducted in the usual manner. b. Suggested Solutions. c. f. d. Net. etc.2 © Copy Right: Rai University . In our system the assignments are executed by the Syndicates. They may recommend deletion/modification/ addition to the syndicate solution. quality of presentation (Slide / Power point presentation / OHP Film). All the members of the syndicate are expected to share the presentation of the assignment executed by them. b. Initial discussion to identify the job description. d. clarity of concept. Desire to studiously go through the study material and research books. Each member of the team gathers the desired data. e. It also helps those who are not as good in the subject as some of their other colleagues are. if any. While they are expected to present common solution.

The Strategic Concept of Marketing By the 1990s. There is a growing recognition that profits are a reward for performance (defined as satisfying customers in a socially responsible or acceptable way). marketing must focus on the customer in context and deliver value by creating stakeholder benefits for both customers in context and deliver value by creating stakeholder benefits for both customers and employees. and the broader economic. This expanded concept of marketing was termed boundary less marketing by Jack Welch. society. marketing practice. and government. you may be sitting in a chair imported from Brazil or at a desk imported from Denmark. tools. practices and procedures. The computer on your desk could be a sleek new IBM ThinkPad designed and marketed worldwide by IBM and manufactured in Taiwan by Acer. Your shoes are likely to be from Italy. which can be a source of funds for investing in the business and for rewarding shareholders and management. 2. it was clear that the “new” concept of marketing was outdated and that the times demanded a strategic concept the strategic concept of marketing. government policy and regulation. profit is still a critical objective and measure of marketing success. The spectacular inroads of the “ clones” into IBM’s PC market illustrate that even the largest and most powerful companies can be challenged by competitors who are more efficient or who are willing to accept lower profit returns. in addition to being a concept and philosophy is a set of activities and a business process. these elements constitute a teachable and learnable body of knowledge. and political macro forces that shape the evolution of markets. The marketing management process is the task of focusing the resources and objectives of the organization on opportunities in the environment. customers. and each country is unique. and the key stakeholder is the customer. and experience. Finally. If your customer can get greater value form your competitor because your competitor is willing to accept a lower level of profit reward for investors and management. In other words. of course. chairperson and chief executive officer (CEO) of General Electric. place (distribution). 3.625. it is necessary to have an employee team committed to continuing innovation and to producing quality products. Together. Indeed. As you read this chapter. 4. varies form country to country.. INTERNATIONAL MARKETING Marketing: A Universal Discipline The foundation for a successful global marketing program is a sound understating of the marketing discipline. Why is international marketing required? 5. To succeed. price. Each person is unique. Thus. competitors. UNIT I INTRODUCTION to stakeholder benefits. and you will be out of business. The first and most fundamental fact about marketing is that it is universal discipline. If your customer can get greater value for stakeholders. theories. which integrates marketing with the other management functions. and promotion (or communications). and the coffee you are sipping is form Latin America or Africa. Knowing everything there is to know about the customer is not enough. The means of the strategic marketing concept is strategic management. In global marketing this may mean working closely with home –country government trade negotiators and other officials and industry competitors to gain access to a target country market. channels of distribution. social. it may be necessary to change our marketing plan. marketers must know the customer in a contact including the competition. the Swedish global furniture retailer. or perhaps a Macintosh designed and marketed worldwide by Apple and manufactured in Ireland. Understanding of international marketing. it is a critical means to the end of creating stakeholder benefits. A revolutionary development in the shift to the strategic concept of marketing is in the marketing objective : from profit 11. One of the tasks of strategic management is to make a profit. Benefits of international marketing. These four Ps can be expanded to five Ps by adding probe (research). This reality of differences means that we cannot always directly apply experience form one country to another. shifted the focus of marketing from the customer or the product to the customer in the context of the broader external environment. Marketing is a set of concepts. Profitability is not forgotten in the strategic concept. If the customers. the customer will choose your competitor. Inc. To compete in today’s market. The various management orientations. a major evolution in the history of marketing thought. This change is a revolutionary idea that is accepted today by a vanguard minority of marketing practitioners. You may have purchased these items form IKEA. They include the employees and management. to mention only the most prominent. The three basic principles that underlie marketing are discussed next. Marketing is the process of focusing the resources and objectives of an organization on environmental opportunities and needs. Distinguish between international and domestic marketing. We live in a global marketplace.2 © Copy Right: Rai University 1 . and available media are different. the strategic concept of marketing has shifted the focus of marketing form a microeconomics maximization paradigm to a focus of managing strategic partnerships and positioning the firm between vendors and customers in the value chain with the aim and purpose of creating value foe customers.LESSON 1: INTRODUCTION TO INTERNATIONAL MARKETING Learning Objectives from the lesson: 1. Stakeholders are individuals or groups who have an interest in the activity of a company. The aim of marketing is to create value for stakeholders and the key stakeholder is the customer. product. but it is not an end in itself. Marketing. Although marketing is universal. The marketing activities are called the four Ps.

focused on giving customers computing power at low prices. Much of the controversy about marketing dates to professor Theodore Levitt’s 1983 seminal article in the Harvard Business Review. competitors. and the third the principal for achieving the first two. and each country are unique. large and small. However. ”Theodore Levitt’s comment about the world becoming homogenized is bunk. Some well-publicized failures by parker pen and other companies seeking to follow Levitt’s advice brought his proposals into question. kenichi Ohmae explains that Coke’s success in Japan could be achieved only by spending a great deal of time and money becoming an insider. c. For example. the advertising and point of sale promotion.The Three Principles of Marketing The essence of marketing can be summarized in three great principles. If the benefits are strong enough and valued enough by customers.” Indeed. was a function of its ability to achieve “global localization. switching costs) P= price Price. The business press frequently quoted industry observers who disputed Levitt’s views. high-quality world products and market them around the globe using standardized advertising. or by a combination of these elements. In his book.625. it may be necessary to change our marketing plan. b. can increase value for the customer. All great enterprise. is successful because they have understood and applied this great principle. One of the most powerful strategies for penetrating a new national market is to offer a superior product at a lower price. tools. tale The wall street Journal. The transfer led to a decline of 1 percent in U. Focus The third marketing principle is focus. Coke’s success in Japan. for example. for example. according to Ohmae. it was global marketing that made Coke a worldwide success. This means that marketing practice must vary from country to country. Knowledge of the customer combined with innovation and creativity can lead to a total offering that offers superior customer value. INTERNATIONAL MARKETING 2 © Copy Right: Rai University 11. Marketing is a set of concepts.S. Carl Spielvogel. IBM was offering the same computing power at higher prices. the where V= value B= perceived benefits – perceived costs (for example. Dell and Compaq. Companies who don’t appreciate this fact will soon learn about it if they transfer irrelevant experience form one country or region to another. channels of distribution. This reality of differences means that we cannot always directly apply experience form one country to another. as well as the extent to which they must be adapted. Companies with a cost advantage can use price as a competitive weapon. or the distribution of the product. The Borderless world. theories. the product. A clear focus on customer needs and wants and on the competitive offer is required to mobilize the effort needed to maintain a differential advantage. a company does not need to be the low-price competitor to win customer. practices and procedures. “ The Globalization of Markets. pricing. This can be accomplished only by focusing or concentrating resources and efforts on customer needs and wants and on how to deliver a product that will meet those needs and wants.S competitors were delighted. chairman and CEO of the Backer spiel Vogel Bates Worldwide advertising agency. One of the reasons IBM found itself in crisis in the early 1990s was that its competitors had become much more clearly focused on customer needs and wants. Together these elements constitute a teachable and learnable body of knowledge. If the customers. There are about two products that lend themselves to global marketing—and one of them is CocaCola. the second the completive reality of marketing. Expanding or improving product and / or service benefits. Its U. Although the marketing discipline is universal. of those customers who purchase the product.2 . IBM succeeded and became a great company because it was more clearly focused on customer needs and wants than any other company in the emerging dataprocessing industry. Global Marketing: What It is and What It is Not The foundation for a successful global marketing program is a sound understanding of the marketing discipline. Marketing is the process of focusing the resources and objectives of an organization on environmental opportunities and needs. The first and most fundamental fact about marketing is that it is a universal discipline. market share! An important task in global marketing is learning to recognize the extent to which marketing plans and programs can be extended worldwide. the superior quality will make an impression. Customer Value And The Value Equation The task of marketing to create customer value that is greater than the value created by competitors. Focus is required to succeed in the task of creating customer value at a competitive advantage. and experience. vis-à-vis relevant competition that is more attractive to customers. Each person in unique. that success was not based on a total standardization of marketing mix elements. by reducing the price. That is. The first identifies the purpose and task of marketing. The price advantage will get immediate customer attention. the company built a complete local infrastructure with its sales force and vending machine operations.” Professor Levitt argued that marketers were confronted with a “homogenous global village. a. A competitive advantage is a total offer. Competitive or Differential Advantage The second great principle of marketing is competitive advantage. Nestle. and available media are different. and.” the ability to be as much of an insider as local company nut still reaping the benefits that result form world-scale operations. markets and customers are quite differentiated. or the concentration of attention. The advantage can exist in any element of the company’s offer. sought to transfer its great success with a four – flavor coffee line from Europe to the United States.” Levitt advised organizations to develop standardized. and distribution.

By adapting sales promotion. Now. shifting production outside the united states is not advisable at this time.” As we will see many times in this book. the United States. has example. However. Honda earned the distinction of being the number one exporter of cars form the United States by shipping more than 100.S. The decision to enter markets outside the home country depends on a company’s resources. Toyota’s success in the United States is partly attributable to its ability to transfer world –class-manufacturing skills to the united states while using advertising to stress that its Camry is built by American. Coke established such strong brand preference that the company claims a 78 percent share of the soft drink market in Japan.g. consumers continue to snap up U. and the nature of opportunity and threat. which makes local area network routers that allow computers to communicate with each other.S.S. Harley-Davidson’s motorcycles are positioned around the world as the all –American bike.S) Gillette (U.) Packaging Distribution Customer service Sourcing INTERNATIONAL MARKETING The United States but relies on apparel factories in low-wage countries to supply most of its clothing. strongest brand in the world its enviable global position has resulted in part form the Coca-cola symbol is available globally.1 Examples of Global Marketing Global Marketing Company/ Home Country Strategy Brand Name Coca-Cola (U.S.). In Jakarta. Philip Morris (U. has made Marlboro the number one cigarette brand in the world. for example.” because Harley’s competitive advantage is based in part on its “made in the U. Philip Morris. Coke is a product embodying marketing mix elements that are both global and local in nature. Global marketing does mean widening business horizons to encompass the worlds when scanning for opportunity and threat. we do not propose that global marketing is a “knee-jerk” attempt to impose a totally standardized approach to marketing around the world. McDonald’s is upscale dinning.g. The backbone of Caterpillar’s global success is a network of dealers that supports a promise of “24 hour parts and service” anywhere in the world. 11. A “global product” may be “ the same” product everywhere and yet “ different.. In automobiles. Gap focuses its marketing effort on TABLE 1. A Harley.Davidson motorcycle made China would shock Harley buyers. and customer service efforts to local needs.). packaging. The same thing is true for thousands of companies that have successfully positioned their brand independent of country of origin. Toyota (Japan). For example.) Toyota (Japan). A central issue in global marketing is how tailors the global marketing concept to fit a particular product or business. Cisco systems (U. Indonesia. with considerable investment of time and money. designs new products that can be programmed to operate under virtually any conditions in the world. At first.) Product Design Unilever (Great Britain / Netherlands). Gillette uses the same packaging for its flagship sensor razor everywhere in the world. the Japanese unit has created products such as Georgia – brand canned coffee and Lactia.S. and sourcing considerations.” positioning. both companies have invested in manufacturing facilities in the United States and other countries form. Should Harley Davidson start manufacturing motorcycles in a low –wage country such as Mexico or china? Will U.625. Ford (U.A. As the Coca-Cola Company has demonstrated. McDonald’s also customizes its menu offerings in accordance with local eating customs. “ global” marketing may include a combination of standard (e. Unilever uses a teddy bear in various world markets to communicate the benefits of the company’s fabric softener. Global marketing strategies can also be based on product or system design.000 accords and civics to Japan and 35 other countries. A number of other companies have successfully pursued global marketing by creating strong global brands. Harley-Davidson (U.” Global marketing requires marketers to behave in a way that is global and local at the same time by responding to similarities and differences in world markets. for example. Toyota has positioned itself as a global brand independent of any country of origin link. the theme vice.S.S). Honda (Japan). Cisco systems. the brand at this stage of its development is linked to a single country of origin. –built Toyotas? The answer to these questions is “ it all depends. managerial mind –set. a lactic.S. Finally it is necessary to understand that global marketing does not mean entering every country in the world. Italy’s Benetton utilizes a sophisticated distribution system to quickly deliver the latest fashions to its worldwide network of stores.” Coke is the best known. It is the place to be and to be seen in Jakarta. In 1994. A Toyota wherever it is made. Daimler Chrysler (Germany) McDonald’s (U. the actual product itself) and nonstandard (e. product positioning. distribution. The success of Honda and Toyota in world markets was initially based on exporting cars form factories in Japan. Mc Donald’s has designed a restaurant system that can be set up virtually anywhere in the world. distribution. the company also produces over 200 other nonalcoholic beverages to suit local beverage preferences. it means a successful global marketer must have the ability to “think globally and act locally.) Product Benetton (Italy) positioning Caterpillar (U.S. Coca Cola managers did not understand the Japanese distribution system. Like Coca-cola.S.What does the phrase global localization really mean? In a nutshell.S. The Coca-Cola Company’s soft-drink products are distributed in almost 200 countries in fact. In this book.). the ability to think globally and act locally can be a source of competitive advantage. To complement Coke sales.2 © Copy Right: Rai University 3 . Daimler Chrysler has gained global recognition for its Mercedes nameplate BMM automobiles and motorcycles. no carbonated soft drink that promotes healthy digestion and quick refreshment expressly for the Japanese market. distribution or packaging) approaches. The particular approach to global marketing that a company adopts will depend on industry conditions and its source or source or sources of competitive advantage. with many components purchased in the united states. they succeeded in establishing a sales force that was as effective in Japan is it was in the United States. Gap (U. which they export.. customer service.

At some companies. offered this description of the company. Like Jack Welch at GE. Another study found evidence to support the hypothesis that there are four identifiable stages in a firm’s internationalization. There was the king and his court and they were in charge. The development is supposed to take place first within a specific country before being repeated across countries. ethnocentrism means foreign markets are viewed as a means of disposing of surplus domestic production. According to this model. Polycentric Orientation The polycentric orientation is the opposite of ethnocentrism. polycentric. be successful anywhere. For example. The ethnocentric orientation means company personnel see only similarities in markets and assume the products and practices that succeeded in the home country will. Even if consumer needs or wants in international markets differ form these in the home country. Fifty years ago. Nissan’s ethnocentric orientation was quite apparent during its first few years of exporting cars and trucks to the united state. (2) export intenders. Reed is moving to instill a geocentric orientation throughout his company. the ethnocentric orientation means that opportunities outside the home country are ignored. (2) Export via independent representatives (agent) (3) establishment of an overseas sales subsidiary. Likewise. those differences are ignored at headquarters.625. Plans for overseas markets are developed utilizing policies and procedures identical to those employed at home. and (4) overseas production/ manufacturing. b. For a manufacturing firm. foreign operations are viewed as being secondary or subordinate to domestic ones. Designed for mild Japanese winters.and specially those located in a large country such as the United States could operate quite successfully with an ethnocentric orientation. egocentric. the vehicles were difficult to start in many parts of the United States during the cold winter cars.S market.S. Regiocentric and Geocentric Orintatons In a company with a regiocentric orientation. “ we were like a medieval state. Eli Lilly and company operated as an ethnocentric company in which activity outside the United States was tightly controlled by headquarters and focused on selling products originally developed for the U. they adhere to the notion that the products that succeed in the home 4 © Copy Right: Rai University 11. Citicorp’s financial services around the world operated on a polycentric basis. CEO John Reed is attempting to achieve a higher degree of integration between Citicorp’s operating units. (3) Sporadic exporters. Based on his review of a number of the internationalization models. no empirical evidence has been provided so far to support a competing hypothesis that some firms are ”born global” in the sense that their mission from the outset is to become MNCs. therefore. Management at a company with a prevailing ethnocentric orientation may consciously make a decision to move in the direction of geocentricism. The four stages are: (1) nonexporters. and (4) regular exporters. the term multinational company is often used to describe such a structure. It is thus useful to investigate the stages of internationalization. valuable managerial knowledge and experience in local markets may go unnoticed. and geocentric. however they may have begun as domestic firms concentrating on their own domestic markets before shifting or expanding the focus to also cover international markets. At present. Although this can sometimes work to a company’s advantage. due to their demonstrated superiority. can be sold everywhere without adaptation. This assumption lays the ground work for each subsidiary to develop its own unique business and marketing strategies in order to subsidiary to develop its own unique business and marketing strategies in order to succeed. The worldview of a company’s personnel can be described as ethnocentric. Such companies are sometimes called domestic companies. In the ethnocentric international company.The Process of Internationalization For certain firms. The term polycentric describes management’s often-unconscious belief or assumption that each country in which a company does business is unique. ethnocentrism is one of the biggest internal threats a company faces. management views regions as unique and seeks to deep an integrated strategy. and no major modifications are made to products. most business enterprise. however. a. company that focuses on the countries included in the North American Free Trade Agreement INTERNATIONAL MARKETING Management Orientations The form and substance of a company’s response to global market opportunities depend greatly on management’s assumptions or beliefs— both conscious and unconscious— about the nature of the world. It was the land barons went and did their thing. there are four stages: (1) no regular export activities. they may have started at the outset as international firms in the sense that their mission is to be involved in international business activities. which specify the various stages of internationalization models. which specify the various stages of internationalization. An ethnocentric company operates under the assumption that “tried and true” headquarters’ knowledge and organizational capabilities can be applied in other parts of the world. Ethnocentric companies that do conduct business outside the home country can be described as international companies.2 . Realizing that the financial services industry is global zing. For many others. c. Andersen has proposed his own U – model which ahs received mixed empirical support. Ethnocentric Orientation A person who assumes his or her home country is superior compared to the rest of the world is said to have an ethnocentric orientation. country are superior and. The process shows how firm were initially constrained by resource limitations and a lack of expert commitment and how they can become more and more internationalized as more resources are allocated to international activity. James Bailey. a Citicorp executive. Until recently. Until the 1980s. right? No. a U. The orientations are collectively known as the EPRG framework. there is no conclusive evidence to show that domestic firms have generally indeed progressed from one stage to another as prescribed on their way to become more internationally oriented. Nissan’s assumption was that Americans would do the same thing. No systematic marketing research is conducted outside the home country. Today.

The countries of Europe have had similar experience.(NAFTA)—the United States. As a multinational company. Customers wanted value in the form of quality. and opportunities. Philips relied on relatively autonomous national organizations (called Nos in company parlance) in each country. Congress by the U.S. who were looking for value. are excellent markets. Philips’s decision to offer greater design variety was based not on what customers were asking for but. the Netherlands. A regiocentric manager might be said to have a worldview on a 11. Government officials and other observers seem always to point to the negative aspects of international business. they must trade with others to survive. Without foreign markets. only firms with previously substantial market share and international experience could expand successfully. firms. on Philips’s structure and strategy. A first step in this is direction was to create industry groups in the Netherlands responsible for developing global strategies for research and development (R&D). in turn. a European company that focuses its attention on the EU or Europe is regiocentric. which were passed on to consumer with no offsetting increase in consumer benefit. Similarly. and manufacturing. Unfortunately. and marketing conditions in the world that it is impossible and futile to attempt to transfer experience across national boundaries. features. was a classic example of a company with a polycentric orientation. Watch major country organization had its won engineering and manufacturing group. Philips would have been the stronger competitor. the world outside the region of interest will be viewed with an ethnocentric or a polycentric orientation.2 © Copy Right: Rai University 5 . since most European nations are relatively small in size. It is easy to understand how the right strategy resulted in matsushita’s success in the global consumer electronics industry. matsushita offered European customers tow models based on a single chassis. Nestle mentions in one of its advertisements that its own country. some research suggests that many companies are seeking to strengthen their regional competitiveness rather than moving directly to develop global responses to changes in the competitive environment. though its importance is neither well understood nor appreciated. A crucial difference between the orientations is the underlying assumption for each. The ethnocentric orientation is based on a belief in home country superiority. rather. This polycentric. Survival Because most countries are not as fortunate as the United States in terms of market size. A company whose management has a regiocentric or geocentric orientation is sometimes known as a global or transnational company. Benefits of International Marketing International marketing daily affects consumers in many ways. However. Jack Welch’s quote at the beginning of this chapter that “globalization must be taken for granted” implies that at least some company managers must have a geocentric orientation. The underlying assumption of the polycentric approach is that there are so many differences in cultural. lacks natural resources. The difference in competitive advantage between Philips and its Japanese competition was dramatic. regional scale. or a combination of the two. European firms would not have sufficient economies of scale to allow them to be competitive with U. Philips executives consciously abandoned the polycentric multinational approach and adopted a more geocentric orientation. for without food and water form China proper.S. In television receivers. Trade Representative. Each No developed its own strategy. However. and The British colony would not have survived long. forcing it to depend on trade and adopt the geocentric perspective. However. International competition may not be a matter of choice when survival is at stake. Why? Matsushita’s global strategy created value for consumers by lowering costs and. in spite of economic and marketing problems. Moreover firms that retrenched after an international expansion disappeared. headquartered in Eindhoven. Canada. INTERNATIONAL MARKETING Philips and Matsushita: How Global Companies Win Until recently. Many of their charges are more imaginary than real. Matsushita adopted global strategy that focused its resources on serving a world market for home entertainment products. The conference Board is a business information service that assists senior executives and other leaders in arriving at sound The geocentric orientation represents a synthesis of ethnocentrism and polycentrism. According to a report prepared for U. Latin America and Asia / Pacific are experiencing the strongest economic growth. Philips’s European cos offered customers seven different models based on four different chassis. Because the matsushita strategy offered greater customer value. and Mexico — has a regiocentric orientation. Variety entailed higher costs. In contrast. Switzerland. the product designs created by the Nos were not based on customer preferences. This approach worked quite well until Philips faced competition form matsushita and other Japanese consumer electronics companies in which management’s orientation was geocentric. resources. Philips Electronics. The ethnocentric company is centralized in its marketing management. marketing. design –and price. economic. Growth of Overseas Markets Developing countries. and the regiocentric and geocentric companies are integrated on a regional and global scale. They were getting more value from matsushita’s global strategy than from Philips’s multinational strategy. The benefits of international marketing must be explicitly discussed in order to dispel such notions. A company with a geocentric orientation views the entire world as a potential market and strives to develop integrated world market strategies. Hong Kong has historically underscored this point well. Each country unit had its own design and manufacturing operations. If customers had demanded this variety. Philips squandered resources in a duplication of effort that led to greater product variety. A study of five medical – sector industries found that international expansion was necessary when foreign firms entered a domestic market.625. prices. multinational approach was part of Phillips’s heritage and was attractive to Nos that had grown accustomed to functioning independently.S. the polycentric orientation was irrelevant to consumers. respectively. it is a “worldview” that sees similarities and differences in markets and countries and seeks to create a global strategy that is fully responsive to local needs and wants. For example. the polycentric company is decentralized.

A slowing of the growth of the U. well below the levels found in Pakistan (9) and Thailand (75). PepsiCo held on to its network of state run bottlers so as to utilize their ties to old-line management.S. and some countries are relatively warm year round. Canada (169). Bird. Sales and Profits Foreign markets constitute a large share of the total business of many firms that have wisely cultivated markets abroad. INTERNATIONAL MARKETING Marketing Strategy 1-2 The Real Thing vs. Lithuania. R. Asia. Norway. “It may be winter in Nebraska but it’s summer in the Southern Hemisphere” – somewhere there’s a demand and that stabilizes our business. it is a highly mature market. china and India are two of the world’s fastest growing economies.S market. china and India have plenty of room to grow as a market.2 . When the Soviet Union Collapsed.. market). and Thailand. the U. almost twice as fast as domestic profits of the same companies. which can frequently be substantial enough to cause layoffs of personnel. If the Chinese and Indians can be persuaded to drink just one more serving per person a year. each person only consumes an average of three servings in a year. soaps. The Japanese market contributes about $ 350 million in operating income to Coca – Cola (vs. The united states leads the world in coca – cola consumption. The comparable figures for other markets are: Mexico (275 servings). The unfortunate consequence of these variables is sales fluctuations. With consumption of Coca – Cola’s soft drinks averaging 296 eight – ounce servings per person per year in the United States. Non U.S. Japan represents a larger market than the United States. Russian smokers apparently show no concern about the health risks. European. Some 575 billion cigarettes were sold there in 1994 as compared to 490 billion cigarettes sold in the United States. Such markets even out fluctuations by providing outlets for excess production capacity. sales of cigarettes and liquor.625. cola has shrunk form 63. A similar situation pertains to business cycle: Europe’s business cycle often lags behind that of the United States. executives of U. Great Britain (89).5 billion in former East bloc countries to build a new business form scratch.8 percent between 1982 and 1991. sales of cigarettes in the former Soviet Union are still going strong.000 organizations in over fifty nations participate as Associates. In addition it also has a wide lead in Latin America. IBM and Compaq. and South America. Japan (124). Many large U.S manufactures with factories or sales subsidiaries overseas outperformed their domestic counterparts during the 1980s in terms of growth in nineteen out of twenty major industry groups and higher earnings in seventeen out of twenty groups.S manufactures of cosmetics. USA Inc. The world market is more than four times larger than the U. Undoubtedly.S. Germany (189). For every gallon of soda that Coca – Cola sells. Not surprisingly. The case of Coca – Cola clearly emphasizes the importance of overseas markets and (marketing strategy 1 – 2) international sales account for more than 80 percent of the firms operating profits. Hungary. However. and more than 3. It has opened plant in Romania. foreign profit of American firms rose at a compound annual rate of 10. a Nebraska manufacturer of go – carts and minicars for promotional purpose. may depress soft drink consumption. sell more computers abroad than at home. The Pepsi Generation A global market can balance good market with bad ones while there is no question that the U. In addition to being the world’s most populous nations. and the profit potential is limited. According to the U. distillers and tobacco firms probably would be driven to drink and smoke to forget their troubles. Without outside markets.J. The conference Board’s study of some 1500 companies found that U.S market is clearly saturated. coca –cola and Pepsi can derive additional sales of more than two billion cans. on the other hand.4 billion in potential retail sales. In terms of operating profit margins. has found that global selling has enabled the company to have year round production.S.S Department of Commerce. As a result. and vitamins. quickly got rid of the government link and spent more than $ 1. France (56) Egypt (18) Russia (2) and china (1) in the case of India’s 890 million people.S population and changing lifestyles explain why the growth of other markets should be viewed with a critical eye. In the case of Amway Corp. and American firms are all quite excited about doing business with and in china and India.8 percent in 1993 – a loss of $2. Coca cola on the other hand. international giants Philip Morris Co. American marketers cannot ignore the vast potential of international markets. for example. That domestic and foreign sales operate in differing economic cycles works in the favor of General Motors and Ford because overseas operations help smooth out the business cycles of the North American market. a privately held U. and Japanese. Reynolds tobacco international SA. Averaging 296 eight ounce serving per person per year.S cola market is the biggest one in the world.. for instance. Coca –cola has been particularly aggressive in East Europe. 6 © Copy Right: Rai University 11. have entered the market aggressively. it earns thirty – seven cents in Japan – a market difference form the mere seven cents per gallon earned in the United States.S companies have done very well because of other overseas customers. And British – American Tobacco Co. averages only about forty servings and offers great potential for future growth.decisions.3 percent of soft – drink sales in the United state in 1984 to 58. Diversification Demand for most products is affected by such cyclical factors as recession and such seasonal factors as climate. they are less than 15 percent at home but twice that amount overseas. Making Japan the company’s most profitable market. Cold weather. One way to diversify a company’s risk is to consider foreign markets as a solution for variable demand. consumption. $324 million in the U. Coke now leads in market share in every Eastern European country. Pepsi’s lead due to its early distribution deals evaporated. Yet not all countries enter the winter season at same time. and India while planning several more in china. The fitness craze has contributed mightily to the leveling of U.

are the largest category of U. In 1995 the United States accounted for an estimated 11. respectively in 1995. The lack of imported product alternatives forces consumers to pay more. On average.S. The United States is the world’s largest exporter of business services by far. The commerce department estimates that over 37000 U.S. up form 7.S.8 billion and $ 145. including aircraft.625. France was second with 8. South Korea. According to the institute for International Economics – a private. the United States had an unbroken string of trade surpluses.000 per job per year.S cars and $1000 to the prices of Japanese imports. when prices of orange juice were driven upward. United states orange growers finally learned to live with imports because they found that imported Brazilian juice. Those working in an exporting industry are more likely to be college educated to earn higher wages. Imports can also be highly beneficial to a country because they constitute reserve capacity for the local economy. and to be in a good position to benefit form worldwide growth. merchandise trade deficit was $ 174. it had deficits in every year except 1973 and 1975. is able to keep consumers. and – collectively – goods. Business Services Exports Exports of U. In 1995 U. followed by Japan. and beverages.S automakers. and Germany. goods exports are by U. resulting in inflation and excessive profits for local firms. Goods Trade United states two-way trade totaled $ 1324. automotive products.9 billion ad imports of $749. the wages of workers in jobs supported by goods experts are 13 percent higher than the national average. with 16. as have domestic firms. That compares with 1994 shares of GDP for Germany of 24. Business week found that. On the other hand.3 percent in 1994. Without imports (or with severely restricted imports). exports. feeds.8 billion. and foreign firms have paid their American workers the same. Not only do trade restrictions depress prices competition in the short run. After 1970. U. with over one – third of these exports by the U. than non-automotive consumer goods. nonprofit research institute – the growth of foreign ownership has not resulted in a loss of jobs for Americans. Importing products and foreign ownership can provide benefits to a nation.S. Mexico.S. followed by industrial supplies and materials.S.S. unlike those who are employed in the import competing and domestic sectors. Unrestricted trade. exports of services accounted for about 3.S production jobs but at a cost of $ 160.S. The 1995 U.6 percent. consumers switched to apple juice and other fruit drinks. In 1995 the United States retained its position as the world’s largest exporter.0 percent of the nation’s gross domestic product in 1995. 8 percent mineral fuels. After the 1962 freeze.3 percent. services are over one third as large as U.S.S. leading foreign market for export in 1995. but also they can also adversely affect demand for years to come.6 percent of world’s goods exports.4 billion. The short-term gain derived from artificial controls on the supply of imports can in the long run return to haunt domestic firms. Travel service receipts and passenger fares accounted for over 38 percent of the total. there is no incentive for domestic firms to moderate their prices. further exacerbating the problem of inflation. In 1995 jobs supported by goods and services experts reached a record 11million. China. This huge cost was a result of the addition of $400 to the prices of U. which forced the average tariff rates across the board to climb above 60 percent. Total U. Capital goods. Exports and imports of services totaled $ 208. parent corporation shipped to foreign affiliates.6 billion larger than in 1994. 11. goods exports increased to 8. Canada was also the United States leading supplier followed by Japan. the United Kingdom. manufacturing companies exports. contributed significantly to the greater Depression and have the potential to cause wide – spread unemployment again.3 billion in 1995 with exports of $ 574. such as the high tariffs caused by the 1930 Smoot –Hawley Bill.1 percent of the nation’s GDP. and 8 percent agricultural and other goods. goods imports in 1995 were comprised of 84 percent manufactured goods. In Europe. owned multinational corporations. slightly more than one – third of the approximately 104600 U.Inflation and Price Moderation The benefits of export are readily self – evident. Canada was the United States. Import quotas imposed on Japanese automobiles in the 1980 saved 46200 U. INTERNATIONAL MARKETING U. Approximately two thirds of U. This windfall for Detroit resulted in record – high profits for U.S. companies that export.S. From 1891 through 1970. improves the world’s GNP and enhances employment generally for all nations. exports of goods. Trade Facts The United States is the world’s largest economy and the largest market. Employment Trade restrictions. Likewise. Florida orange growers found to their dismay that sharply higher prices turned consumers to other products. by minimizing price increases.2 percent and for Japan of 8. This development usually acts as a prelude to workers demand for higher wages.S.2 © Copy Right: Rai University 7 . Mexico. and Germany. it took the citrus industry ten years to win back these consumers.5 percent of the world’s total in 1994.

Instead.” Marketing Strategy 1 –3 It is OK to Be Un-American The Economist is a news and business weekly publication. Ultimately. Products taken for granted. New York City is merely the world third largest urban center an only two American cities rank among the top twenty. A lack of such trade would inhibit the flow of innovative ideas. they would develop greater understanding as well as more trade. As commented by the chairman of the supervisory board of N. product shortages force people to pay more for less. has applied the lessons learned in Japan to U. Some employers may also have to move certain jobs overseas so as to reduce costs. It makes the following points: The Japanese drink more U.V.Unfortunately there is no question that globalization is bound to hurt some workers whose employers are not cost competitive. Philip’s Gloeilampen – fabrieken. Life in most countries would be much more difficult were it not for the many strategic metals that must be imported. press and your might end up with a wholly one sided dangerously inaccurate – view of the entire world. the real benefit is that the executive actually develops a better understanding of a foreign culture. marketing as a discipline of study is more effectively studied.2 . It is extremely difficult to explain to those who must bear the brunt of unemployment due to trade that there is a net benefit for the country. “American managers should really understand. When it comes to foreign aid. not just say they understand.S. the benefit derived is not so much the understanding of a foreign culture.S. Trade also makes it easier for industries to specialize and gain access to raw materials. Read only the U. As a consequence. As in the case of the state of Connecticut. may become unavailable overnight. while United Technologies Corp. INTERNATIONAL MARKETING 8 © Copy Right: Rai University 11. Coca – Cola Co. some workers will inevitably by unemployed. such as coffee and bananas. bourbon than American. and European markets. (the state’s largest employer) has reduced the number of jobs from 51. the real benefit is that the executive actually develops a better understanding of marketing in one’s own culture. Standards of Living Trade affords countries and their citizen’s higher standards of living than otherwise possible. For example. After all – that society be open to each other. Instead. The study of international marketing thus can prove to be valuable in providing insights for the understanding of behavioral patterns often taken for granted at home. some 200000 jobs were lost. When an executive is required to observe marketing in other cultures. Wanting American readers to subscribe to its publication. Because it’s un – American. And that is the most important thing. Understanding of Marketing Process International marketing should not be considered a subject or special case of domestic marketing. If Americans started doing business with other countries. the Economist is so popular among the ranks of those in the know. The economist is the news and business weekly whose beat is the whole world – including America’s prominent place in it. While at the same time fostering competition and efficiency.S. To close yourself off is the worth thing that can happen. Without trade.625. A diffusion of innovations across national boundaries is a useful by – product of international trade.000 to fewer than 32. that there are other parts of the world beside the United States.000. Denmark is the most generous nation on earth : Nearly seven times as giving as America.

and today the soft-drink industry is a truly global one. Evidence is mounting that consumer needs and wants around the world are converging today as never before.2 Transportation and Communication Improvements The time and cost barriers associated with distance have fallen tremendously over the past 100 years. there are no cultural boundaries limiting its application. and Mexico. changes in the business. any industry subject to these forces is a candidate for globalization. and opportunities for leverage all represent important driving forces. Canada. improve quality. the increasing overlap of advertising across national boundaries and the mobility of consumers have created opportunities for marketers to pursue pan. In regional markets such as Europe. new communication technologies such as e-mail. This phenomenon support Levitt’s prediction concerning the emergence of global markets for standardized products. the growing importance of global marketing stems form the fact that driving farces have more momentum than the restraining forces. Targeted at urban smokers around the world. become driving force behind global marketing. such communication would be difficult to sustain. the brand appeals to the spirit of freedom.625. The common elements in human nature provide an underlying basis for the opportunity to create and serve global markets. is deliberate. This creates an opportunity for global marketing. Driving Forces Converging market needs and wants. During the 1990s. Physical distribution has declined in terms of cost. Philip Morris. Once a technology is developed. no one needs soft drinks. During most of those decades. The need addressed by Marlboro is universal. Today. Marlboro is an example of a successful global brand. and open space symbolized by the image of the cowboy in beautiful. which markets Marlboro. behavior. Market Needs and Wants A person studying markets around the world will discover cultural universals as well as cultural differences. Without modern jet travel. companies from different parts of the world in different industries achieved great success by pursuing international. and. According to the Pharmaceutical 9 © Copy Right: Rai University . The General Agreement on Tariffs and Trade (GATT). The perunit cost of shipping automobiles from Japan and Korea to the United States by specially designed auto-transport ships is less than the cost of overland shipping from Detroit to either U. In the 1990s. The jet airplane revolutionized “communication by making it possible for people to travel around the world in less than 48 hours. Marketing has driven this change in. and yet today in some countries per capita soft drink consumption exceeds the consumption’ of water. the basic appeal and execution of its advertising and positioning are global. therefore. A similar revolution has occurred in transportation technology. the time required for shipment has been greatly reduced as well.INTERNATIONAL MARKETING LESSON 2: INTRODUCTION TO INTERNATIONAL MARKETING-2 Driving and Restraining Forces Affecting Global Integration and Global Marketing The remarkable growth of the global economy over the past 50 years has been shaped by the dynamic interplay of various driving and restraining forces. is a global company that discovered years ago how the same basic market need can be met with a global approach. Technology Technology is a universal factor that crosses national and cultural boundaries. The pharmaceuticals industry provides a striking illustration of this driving force. Most global markets do not exist in nature: They must be created by marketing effort. Product Development Costs The pressure for globalization is intense when new products require major investments and long periods of development time. global economic growth. the expanding membership of the European Union is lowering barriers to trade within the region. but it has come under attack by developing countries. executives. For example. independence. NAFTA is already expanding trade among the United States. Satellite dishes. which was ratified by more than 120 nations in 1994. Globe-spanning television networks such as CNN and MTV. A letter from China to New York is now delivered in eight days faster than domestic mail is delivered within many countries. In his landmark Harvard Business Review article. Technology is truly “stateless”. In Europe. and teleconferencing and videoconferencing allowed managers. open western settings. pressure to cut costs. and customers to link up electronically from virtually any part of the world for a fraction of the cost of air travel. Regional Economic Agreements A number of multilateral trade agreements have accelerated the pace of global integration. and the Internet are just a few of the technological factors underlying the emergence of a true global village.S. Tourism enables people from many countries to see and experience the newest products being sold abroad. in fact. improvements in communication and transportation technology. has been replaced by the world Trade Organization to promote and protect free trade. multinational. or global strategies. The word create 11. Multinational companies pursuing strategies of product adaptation run the risk of being overtaken by global competitors that have recognized opportunities to serve global customers. One essential characteristic of the effective global business is face-to-face communication among employees and between the company and its customers. pressure to improve quality. coast.European product positioning. fax. it soon becomes available everywhere in the world. technology advances. Levitt anticipated the communication revolution that has.

625. Asea Brown Boveri (ABB). Leverage A global company possesses the unique opportunity to develop leverage. uniformity. Also. global marketing does not necessarily mean operating everywhere. has considerable experience with a well-tested management model that it transfers across national boundaries. which. support design and manufacturing quality. May have many. by 1982.13 Such costs must be recovered in. Quality Global marketing strategies can generate greater revenue and greater operating margins. and other global companies can achieve world-class quality. engineering. For truly global products. For example. scale economies were a cornerstone of Japanese success in the 19708 and 1980s. Predictably. uniformity can drive down research. there is often plenty of opportunity for everyone. First. economic growth has reduced resistance that might otherwise have developed in response to the entry of foreign firms into domestic economies. it achieved scale economies by exporting videocassette recorders (VCRs). a company with 1. the cost of developing a new drug had reached $359 million. design. the cost of developing a new drug in 1976 was $54 million. the cost had increased to $87 million. It is easy to understand how Nissan. policy makers are likely to look favorably on outsiders. after acquiring Combustion Engineering (a U. For example. and global strategy. the worldwide recession of the ea. Without economic growth. A global and a domestic company may each spend 5 percent of sales on research and development. regardless of the nationality of the supplier. The trend toward privatization is opening up formerly closed markets significantly. but the global company. It can draw on management practices. the global marketplace. Matsushita. The Zurich-based company knows that a company’s headquarters can be run with a lean staff. The worldwide movement toward deregulation and privatization is another driving force. Scale Economies The global company can take advantage of its greater manufacturing volume to obtain traditional scale advantages within a single factory. When a global company establishes a benchmark in quality. Leverage from scale economies is not limited to manufacturing. World Economic Trends There are three reasons why economic growth has been a driving force in the expansion of the international economy and the growth of global marketing. It is possible for a “foreign” company to enter a domestic economy and to establish itself without taking business away from local firms. and cost reduction were all driving forces behind Ford’s development of its “World Car.r1y 1990s created pressure in most countries. An independent. At the same time. global enterprises may take business away from domestic ones. it is much easier to require it to buy only from national companies. tremendous opportunities are being created as a result. Japan’s giant Matsushita Electric Company is a classic example of global marketing.” which is sold in the United States as the Ford Contour and Mercury Mystique and in Europe as the Mondeo. to limit access by foreigners to domestic markets. By 1993. When ABB acquired a Furnish company. Four important types of leverage are experience transfers. slow growth in a company’s domestic market can signal the need to look abroad for opportunities in nations or regions with high rates of growth. Domestic businesses are more likely to seek governmental intervention to protect their local position if markets are not growing. in the $200 billion pharmaceutical industry. finished products can be produced by combining components manufactured in scale-efficient plants in different countries. ABB knew from experience that the headquarters staff of8oo could be drastically reduced. in turn. Times the total revenue of the domestic because it serves the world market. in spite of the fact that Combustion Engineering. had a justification for every one o f the headquarters staff positions. Caterpillar. © Copy Right: Rai University 11. Quality. Privatization of telephone systems around the world is creating opportunities and threats for every company in the industry. and production costs across business functions. growth has created market opportunities that provide a major incentive for companies to expand globally. or sales or promotional ideas that have been tested in actual markets and apply them in other comparable markets. seven countries account for 75Percent of sales.600 to 100 between 1988 and 1989.2 . televisions. it reduced the headquarters staff from 880 to 2S’between 1986 and 1989. Headquarters staff at a German unit was reduced from 1. competitors must quickly make their own improvements and come up to par. scale economies. advertising appeals. products. As noted earlier.Manufacturers Association (PMA).300 operating subsidiaries in 140 countries. and other consumer electronics products throughout the world from world-scale factories in Japan. A growing country means growing markets. for example.S. a global company can achieve the same economies on a global scale by centralizing functional activities. when a nation’s telephone company is a state 10 monopoly. Second. strategies. The larger scale of the global company also creates opportunities to improve corporate staff competence and quality. Global competition has forced all companies to improve quality. as no single national market is likely to be -large enough to support investments of this size. Experience Transfers INTERNATIONAL MARKETING A global company can leverage its experience in any market in the world. However. Leverage is simply some type of advantage that a company enjoys by virtue of the fact that it conducts business in more than one country. company producing power plant boilers). private company will be more inclined to look-for the best offer. The importance of manufacturing scale has diminished somewhat as companies implement flexible manufacturing techniques and invest in factories outside the home country. Just as a domestic company can achieve economies in staffing by eliminating duplicate positions after an acquisition. resource utilization. When a country is growing rapidly. Global companies ‘raise the bar” for all competitors in an industry.

It is illegal in some countries to use comparative advertising. This takes great discipline. The world is full of currencies. When a global company such as ABB acquires or establishes a subsidiary in France. however. Such control ranges from a monopoly controlling access to tobacco markets to national government control of broadcast. organizational culture. Gillette Company. The global enterprise has both responded to market opportunity and competitive threat by going global and at the same time has been one of the forces driving the world toward greater globalization. A company that is “nearsighted” and ethnocentric will not expand geographically. there is no room for local initiative or an in-depth knowledge of local needs and conditions. tariff barriers have been largely removed in the high-income countries. A global’ strategy’s built on an information system that s a st ew r db s n s e v r n n identify opportunities. or any business enterprise that pursues global business objectives by linking world resources to world market opportunity. Executives and managers at successful global companies have learned how to integrate global vision and perspective with local market initiative and input A striking theme emerged during interviews conducted by the author with executives of successful global companies. Global marketing does not work without a strong local term that can provide information about local market conditions. Today. threats.625. It becomes an “insider. Japan. The global strategy is a design to create a winning offering on a global scale. founded in 1986. Its founding generation consisted of third-generation Arizonans. money. For example. the phrase meant a ceaseless search for business opportunities within the state. and underlying forces in the world. which uses SECAM).” Global advertising and promotion are also hampered by government regulations. restraining. Acquired Parker. For example.2 © Copy Right: Rai University 11 . The only way Global companies -can overcome these barriers is to become “insiders” in every country in which they do business. British Biotechnology Group. The reward is not just success-it is survival. Buy American or Look Abroad? INTERNATIONAL MARKETING The global company’s greatest single advantage can be its global strategy. because for this company there really is no such thing as a home currency. 11. In some countries. descendants of the state’s earliest pioneers. For a global company.” To them. such as Germany. raised $60 million from investors in the United States. That theme was the respect for local initiative and input by headquarters executives. Global Strategy experience gained by local market representatives. subsidiaries eventually: the. c n h o l u i e s n i o meto t trends. management simply ignores opportunities to pursue global marketing. several restraining forces may’ slow a company’s efforts to engage in global marketing. and a global company seeks financial resources on the best available terms. the PAL system is uses. over the restraining forces. favoring national suppliers when awarding contracts. often boasting that the family’s rise to relative prosperity was a result of “thinking Arizona. premiums and sweepstakes are illegal. the global company adheres to the three principles identified earlier: It leverages its skills and focuses its resources to create superior perceived value for’ customers and achieve competitive advantage. whereas in Europe (except for France. Inc. Executives at Parker Pen once attempted to implement a top-down marketing strategy that ignored Jeffrey A. Fadiman San Jose State University Arizona Sunray is one of the pioneering companies in solar energy within that state. and constant effort. Myopia is also a recipe for market disaster . In companies in which subsidiary management “knows it all. and Great Britain.K.if headquarters attempts to dictate when it should listen. Three important restraining forces are management myopia. The Global/Transnational Corporation The Global/transnational Corporation. equipment transmission markets. and national controls. the global corporation has taken advantage of the expanding communications technologies to pursue market opportunities and serve needs and wants on a global scale. The founders took great pride in that pioneering heritage. non tariff barriers (NTBs) still make it more difficult for outside companies to succeed in foreign markets. Videotape players in the Americans and Japan use the NTSC standard. Costly market failures resulted in Parker’s buyout by managers of the former U. Also working against global advertising is the use of different technical standards around the world. National Controls and Barriers Every’ country protects local enterprise and interests by maintaining control over market access and entry in both low-and high-tech-tech industries and advertising. This is equally true for established companies and start-ups. it uses them where there is the greatest opportunity to serve a need at a profit.Resource Utilization A major strength of the global company is its ability to scan the entire world to identify people. Arizona Sunray. Within the international financial framework and under the umbrella of global peace. is the organization that has responded to the driving. As we have noted. Restraining Forces Despite the impact of the driving forces identified earlier. In turn. and resources. much creativity. in today’s world the driving forces predominate. utility companies in France are notorious for accepting bids from foreign equipment suppliers but in the end. When opportunities are identified. and the corresponding respect for headquarters’ vision by local executives. it is not problematic if the value of the “home” currency rises or falls dramatically.” there is no room for vision from the top. In companies in which headquarters management is all knowing. That is why the importance of global marketing is steadily growing. Management Myopia and Organizational Culture In many cases. However. and other economic agreements. thanks to the World Trade Organization WTO) NAFTA. . it can receive the same treatment as other local companies. and raw materials that will enable it to compete most effectively in world markets.

or sluggish service. and increase sales. do you think that it applies to the problems that McDonald’s has in the restaurant business? © Copy Right: Rai University 11. they proposed a further expansion. “Why even bother?” the firm’s first president asked.2 . However. and in September 2002. and lowering prices on various items to try to appeal to more people.S. What are some of the issues in having a mascot like Ronald McDonald in another culture besides the U. The company is extremely successful despite being a symbol of American imperialism. The company’s commercials in the UK have taken a turn for the worse lately.? How can it be effective in other national settings? 3. and then into Nevada and New Mexico. The text discussion refers primarily to manufactured products. The next generation took control of the business in 1965. We know our product. with other members of his family. 17 October 2002.” Reasoning that the way to acquire new business was to follow the sun. which became “Catch the Rays: It’s California’s Way. and the firm continued to expand. order mistakes. The company seems to be responding by supporting more community programs and increasing its sponsorship of charitable causes. though now retired held considerable influence. and being hated by animal rights activists. into what proved to be a surprisingly successful firm. Salomon Smith Barney forecasted McDonald’s stock would under perform. groups promoting healthy diets. and fears of mad cow disease. refusing to contemplate such radical ideas. As a consequence. and getting the message out about its products.” The concept proved quite successful. eventually named Arizona Sunray. west into the larger urban population centers of coastal California. lacking a cohesive message. This market’s huge! We’re making steady profits. and according to Interbrand. one member of this generation emerged as a new type of pioneer-one of a cluster of scientists and businessmen who hoped to develop the first practical applications of solar energy on a scale available to home owners. By 1995 members of the next generation were just beginning to reach positions of influence and authority within the firm. felt pulled both ways and wondered if there might be ways to satisfy both sides. seeking to “follow the sun” on a scale undreamed of by their elders. The youngest. though holding formal decision-making powers. including a change in the firm’s slogan. where do you think McDonald’s stands on the range from standardization to adaptation in terms of its global marketing? 2.vegetarians suing over eating its beefbased cooking oil. why look abroad?” Members of all three generations met to thrash out the issue. diversifying its menu offerings to include healthier choices or touches of cuisines favored in the local area. a decision was made to redirect expansion away from the relatively unpopulated states of the Southwest and move due. the 8th most valuable brand. the firm expanded into every area of Arizona. Every member of this family and every worker in this firm is doing fine. popular books criticizing the fast food industry. As a result. Questions 1. felt they held a wider and more flexible perspective. And Kalinowski is not the only one to have noticed. It seems everyone recognizes the golden arches. McDonald’s is experimenting with new restaurant designs. INTERNATIONAL MARKETING McDonald’s is the world’s biggest restaurant chain. keep its image fresh. The company has been beleaguered by bad press . Leaked internal memos suggest company executives are questioning his relevance for today’s children. such as funding Unicef’s World Children’s Day. Even the role of Ronald McDonald in the company’s communications may be faltering. taking appropriate advantage of new techniques in miniaturization to fulfill an entire range of solar-powered needs-from solar-powered calculators to rural solar cookers-permitting Arizona Sunray (to be renamed Pacific Sunray) to take maximum advantage of both current opportunity and long-range planning for expansion. As a member of the oldest generation. Surviving members of the founding generation instantly rejected the proposal. the firm chose the slogan “Follow the Sun: It’s Arizona’s Way.In the late I 950s. maintaining its positive brand image. had permitted them to acquire both travel experience and education abroad. In the early 1960s. Several aspects of the marketing program were reshaped to appeal more directly to coastal Californians. What advantages could Arizona Sunray derive from an attempt to expand its goods and services abroad? 12 2. we know our clientele. Questions 1. present your case. Why would we want to dissipate our capital in marketing to places we know next to nothing about? The money’s in America. though lacking power. They argued that Arizona Sunray should spread around the entire Pacific Rim. incorporating. Many people around the world are questioning McDonald’s ability to meet its commitment of quality and service in its restaurants. The middle generation. After some experimentation. In general. The Los Angeles/Orange County area was considered particularly favorable for potential expansion. and we know the West. present your case. There are signs that McDonald’s is having difficulty keeping up with the trends in the restaurant industry. “We’re doing fine right in America. As a member of the middle generation. and anti-capitalists. with relatively affluent target populations that might show considerable interest in the use of solar energy within their homes. Their relative affluence. Why should the firm remain within America? What hard questions could you ask of members of the youngest generation that’ might suggest weaknesses in their proposal? 3.625. Yet Mark Kalinowski of Salomon Smith Barney says those things do not make up for rude McDonald’s workers. Whether McDonald’s strategy to stay ahead of the competition will be effective remains to be seen. The oldest. The company’s share price stands at a seven-year low. however. As a member of the youngest generation. he pioneered the use of solar energy in offices and homes. teenagers accusing the restaurant of making them fat. what compromise can you propose that might prove acceptable to both sides? Can Mac Fight Back? LEAD STORY-DATELINE: Marketing.

» Thomas Friedman Keegan and Green. deeper and cheaper than ever before. corporations. and nation-states to reach around the world farther. pricing. and services to create exchanges that satisfy individual and organizational goals.2 © Copy Right: Rai University 13 .INTERNATIONAL MARKETING Reasons for Global Marketing • Growth – Access to new markets – Access to resources Globalization • Globalization is the inexorable integration of markets.in a way that is enabling individuals. and distribution of goods. Chapter 1 5 • Survival – Against competitors with lower costs (due to increased access to resources) Keegan and Green. deeper. and nation-states farther. Keegan and Green.625. ideas. faster. faster. and in a way that is enabling the world to reach into individuals. nation-states. Chapter 1 2 What is a Global Industry? Global Marketing Vs. corporations. and technologies to a degree never witnessed before . • Global marketing focuses on global market opportunities and threats. Chapter 1 3 • An industry is global to the extent that a company’s industry position in one country is interdependent with its industry position in another country • Indicators of globalization: – Ratio of cross-border trade to total worldwide production – Ratio of cross-border investment to total capital investment – Proportion of industry revenue generated by companies that compete in key world regions Keegan and Green. Marketing • Marketing is the process of planning and executing the conception. Chapter 1 6 11. promotion. and cheaper than ever before.

2 . not just on reactivity Principle no. customers and relationships Principle no. context and infrastructure Principle no. why and how Principle no. logistics and communications Principle no. 14: The principle of marketing mix: Integrate your offer. 3: The principle of competition: Marketing war is about value war Principle no. Chapter 1 11 Principle no. 16: The principle of totality: Balance your strategy. The Marketing Company is an organization that adopts the 18 Guiding Principles of the Marketing Company as its credo-as its guiding values. It endures external and internal change drivers.625. 6: The principle of anticipation: Concentrate on proactivity.INTERNATIONAL MARKETING 14 Globalization or Global Localization? • Globalization – Developing standardized products marketed worldwide with a standardized marketing mix – Essence of mass marketing The 18 Guiding Principles of The Marketing Company What is the marketing company? As you will soon explore the characters of the company in the following pages. not just on averages Principle no. 7: The principle of brand: Avoid the commodity-like trap Principle no. 2: The principle of the community: Marketing is everyone’s business Principle no. 11: The principle of targeting: Allocate your resources effectively Principle no. Be ready to rewrite your credo or your company will die. a new competition needs a different kind of rules and principles to survive and win the race. • Global localization – Mixing standardization and customization in a way that minimizes costs while maximizing satisfaction – Essence of segmentation – Think globally. 12: The principle of positioning: Lead your customers credibly Principle no. its principles to compete in the new marketplace. After all. 10: The principle of segmentation: View your market creatively Principle no. 18: The principle of utility: Integrate your present. tactics and value Principle no. 13: The principle of differentiation: Integrate your content. Principle no. 4: The principle of retention: Concentrate on loyalty. act locally Keegan and Green. 1: The principle of the company: Marketing is a strategic business concept. 9: The principle of process: Avoid the function-orientation trap Examples of Global Marketers • • • • • • • • • Coca-Cola Philip Morris Daimler-Chrysler McDonald’s Toyota Ford Unilever Gillette IBM • • • • • • • • • USA USA Germany USA Japan USA UK/ Netherlands USA USA 13 Principle no. not just on satisfaction Principle no. 8: The principle of service: Avoid the business-category trap Principle no. 17: The principle of agility: Integrate your what. 5: The principle of integration: Concentrate on differences. it is not just a marketing-oriented company. more demanding customers. future and gap Keegan and Green. Chapter 1 © Copy Right: Rai University 11. and even fiercer competitors. 15: The principle of selling: Integrate your company.

there is global economic growth. across the spectrum of products from basic to luxury. manufacturing holds a steady 23 to 24 percent of gross national product (GNP). Concurrently. which is $250 trillion per year-40 times the volume of world trade in goods and services. This explains the bizarre combination of U. the fastest-growing markets. Economic integration stood at 10 percent at the beginning of the 20th century. The second change : concerns the relationship between productivity and employment. UNIT II GLOBAL MARKETING ENVIRONMENT • Production has become “uncoupled” from employment. The third major change : is the emergence of the world economy as the dominant economic unit. Also available on a global basis are demographic data indicating the number of people. • The world economy dominates the scene. or durables require a large base of consumers with the ability to make large purchases of goods and the ability to drive away with those purchases.LESSON 3: ECONOMIC ENVIRONMENT-THE WORLD ECONOMY The macro dimensions of “the environment is economic. the integration of the world economy has increased significantly. productivity continues to grow. Although employment in manufacturing remains steady or has declined. Luxury products. Manufacturing is not in decline-it is employment in manufacturing that is in decline. political and legal and technological”. Without money. are in countries at earlier stages of development. In addition. responding to new opportunities. cannot be sold to low-income consumers. The dollar value of world trade is greater than ever before. Each is important. it is capital movements and trade that determine currency value. in contrast to any previous time in the history of the world. the European Union (formerly the European Community) and the North American Free Trade Area. markets in every region of the world are potential targets for almost every company from high tech to low tech. The real secret of the economic success of Germany and Japan is the fact that business leaders and policy makers focus on the world economy and world markets. Trade in goods and services is running at roughly $4 trillion per year. Today. The growth of commerce via the Internet diminishes the importance of national INTERNATIONAL MARKETING Barriers. have focused on domestic objectives and priorities to the exclusion of their global competitive position. The pattern is especially clear in American agriculture. social and cultural. Countries such as the United Kingdom. their distribution by age category. The economic dimensions of this world market environment are of vital importance. Integration is particularly striking in two regions. Previously. In the 1990s the greatest economic change was the end of the Cold War. The success of the capitalist market system had caused the overthrow of communism as an economic and The World Economy-An Overview The world economy has changed profoundly since World War II. Company executives and national leaders who recognize this have the greatest chance of success. Sophisticated industrial products require sophisticated industries as buyers.625. where fewer farm employees’ produce more output. furniture. government expenditures. Within the past decade. The • macroeconomics of individual countries no longer control economic outcomes. investment. many things are impossible for the marketer. have steadily displaced local ones. The likelihood of business success is much greater when plans and strategies are based on the new reality of the changed world economy: • Capital movements rather than trade have become the driving force of the world economy.S. for example. Each country has national accounts data. National accounts and demographic data do not exhaust the types of economic data available. it is approximately 50 percent. Indeed. The first change : is the increased volume of capital movements. foreign exchange transactions are running at approximately $1 trillion per day worldwide. its currency would depreciate in value. but perhaps the single most immortal characteristic of the global market environment is the economic dimension. Hypermarkets for food. In contrast. there have been several remarkable changes in the” world economy that hold important implications for business. today. as we shall see. a top priority for government and business in both Japan and Germany has been their competitive position in the world. trade deficits and a continually rising dollar during the first half pf the 1980s. Today. gross domestic product. 11. indicating estimates of gross national product. including the United States.2 © Copy Right: Rai University 15 . have lost both production and jobs for their efforts. For the first time in the history of global marketing. many other countries. This is true of all the other major industrial economies as well. That totals to $100 trillion per year-25 times the dollar value of world trade. There is an inescapable conclusion in these data: Global capital movements far exceed the volume of global merchandise and services trade. With money. and price levels. This chapter examines the characteristics of the world economic environment from a marketing perspective The global marketer is fortunate in having a substantial body of data available that charts the nature of the environment on a country-by-country basis. but the London Eurodollar market turns over $400 billion each working day. Perhaps the most fundamental change is the emergence of global markets. when a country ran a deficit on its trade accounts. and rates of population growth. all things (well. which have tried to maintain blue-collar employment in manufacturing. almost all!) are possible. Those who do not recognize this fact will suffer decline and bankruptcy (in business) or overthrow (in politics). consumption. global competitors. In the United States.

For the 24 member countries of the Organization for Economic Cooperation and Development (OECD). and India-relied on command allocation systems for decades.418 2. The United States. Heavy reliance on foreign aid 5. in Bangladesh. All three countries are now engaged in economic reforms directed at shifting to market allocation system. south of the Sahara In general. All market systems have a command sector. Still. These countries constitute 39 percent of the world population but only 11 percent of world GNP. the elements of the marketing mix are not used as strategic variables. These countries are at the early stages of industrialization. this proportion ranges from 32.031 Lower. Political instability and unrest 6. in other words. and package foods. where GNP per capita is $366. for example.percent of GDP in the United States to 64 percent in Sweden. b. these countries represent limited markets for all products and are not significant locations for competitive threats. Global country markets are at different stages of development.656) 24. The market system is an economic democracy—citizens have the right to vote with their pocketbooks for the goods of their choice. the command allocation sector is the proportion of gross domestic product (GDP) that is taxed and spent by government.125. advertising.2 . and promotion. most Western European countries. GNP per capita provides a very useful way of grouping these countries. socialist countries were traditionally permitted to offer part of their production in a free market. Command Allocation In a command allocation system. are those with incomes of less than $786 per capita. and Japan-the triad countries that account for three quarters of gross world product-are examples of predominantly market economies. They constitute 37 percent of the world population but less than 3 percent of world GNP.3 In Sweden. Although the income definition for each of the stages is arbitrary. and mixed allocation.655) 2. ‘and all command systems have a market sector. The different types of economic systems are contrasted in the next section. Limited industrialization and a high percentage of the population engaged in agriculture and subsistence farming 2. the economic system is more “command” than “market. Income Group by per capita GNP 2000 GNP ($ millions) 2000 GNP per capita ($) 24. A key policy change in such countries has been the abandonment of futile attempts to manage national economies with a sentential plan.126 but <$9. the state has broad powers to serve the public interest. High birthrates 3. Using GNP as a base.302 356 % of world GNP 81 7 10 3 2000 population (million) 981 451 2. b. a.125) Low income countries 3.755 4.625. respectively. also known as preindustrial countries. tires. China has given considerable freedom to businesses and individuals in the Guangdong province to operate within a market system. there are exceptions. These include deciding which products to make and how to make them. Lower-middle-income Countries Lower-middle-income countries (also known as less developed countries or LDCs) are those with a GNP per capita of more than $786 and less than’ $3. Thus. The role of the state in a market economy is to promote competition and ensure consumer protection.284 High income countries (GNP per capita >$ 9. Cuba stands as one of the last bastions of the command allocation approach. the former USSR. therefore. Three of the most populous countries in the world-China. a growing garment industry has enjoyed burgeoning exports. the stages provide a useful basis for global market segmentation and target market INTERNATIONAL MARKETING Economic Systems There are three types of economic systems capitalist. Similarly. Low-Income Countries Low-income countries. Mixed System There are. This classification is based on the dominant method of resource allocation market allocation. Factories supply a growing domestic market with such items as clothing. Consumers are free to spend their money on what is available. batteries. but decisions about what is produced and. where 64 percent of all expenditures are controlled by government. By contrast. socialist. The clear superiority of the market allocation system in delivering the goods and services that people need and want has led to its adoption in many formerly social. and mixed. The overwhelmingly superior performance of the world’s market economies has led socialist countries to renounce their ideology. distribution is handled by the government to cut out “exploitation” by intermediaries.503 1.” In a market economy. farmers in most Stages of Market Development a. Still. building materials. countries in each of the four categories have similar characteristics. These countries are also locations for the production of standardized or mature products such as clothing for export markets. Market Allocation A market allocation system is one that relies on consumers to allocate resources. they are “mixed.148 GNP per capita >$ 785) 812 16 © Copy Right: Rai University 11. c. Because demand exceeds supply. command or central plan allocation. therefore. we have divided global markets into four categories. There is little reliance on product differentiation.middle income countries (GNP per capita >$785 but <$ 3. Concentration in Africa. China’s private sector constitutes only 1 to 2 percent of national output. Consumers “write” the economic plan by deciding what will be produced by whom. what is available are made’ by state planners.political system. The following characteristics are shared by countries at this -income level: 1. no pure market or command allocation systems among the world’s economies. Low literacy rates 4.259 Upper-middle-income countries (GNP per capita >$ 3. in reality.” The reverse is true in the United States.

$4. and Japan and other advanced. They do not reflect the actual purchasing power and standard of living in the different countries. c. Several factories there produce athletic shoes under contract for Nike. Others are once growing and successful countries that have become divided by political struggles. are those with GNP per capita above $9. the percentage of population engage4 in agriculture drops sharply as people move to the industrial sector and the degree of urbanization increases.176 in 2000. and postindustrial. Note that the shares of world GNP and the GNP per capita data. The phrase postindustrial countries was first used by Daniel Bell of Harvard to describe the United States. d. With the exception of a few oil-rich nations. Countries hi this stage of development Frequently become formidable competitors and experience rapid. these data are not available ill regular statistical reports. global companies in a range of communication-related industries were seeking create new markets for multimedia.S. Product and market opportunities in a postindustrial society are more heavily dependent on new products and innovations than in industrial societies.6$5. particularly those that have a very low unit cost—cigarettes.655. but they still have significantly lower wage costs than the advanced countries. dollars should be calculated on the basis of purchasing power parities (i. they can endeavor to create new markets. Other aspects of the postindustrial society are an orientation toward the future and the importance of interpersonal relationships in the functioning of society. Basket Cases A basket case is a country with economic. also known as industrializing countries. These countries account for 7 percent of world population and almost 7 percent of world GNP In these countries. are also called industrializing countries. it often finds that. After all. The typical” consumer in Chile has more than twice the purchasing power than the Brazilian consumer. at best. and of scientists and professionals over engineers and semiskilled workers.126 and $9. Are based on income in national currency translated into U. industrialized.035. the crucial importance of information processing and exchange.e. Ideally. and. and the ascendancy of knowledge over capital as the key strategic resource. Sweden. GNP and other measures of national income converted to U. for example-are rapidly industrializing. LDCs have a’ major competitive advantage in mature. labor-intensive products such as athletic shoes. Bell suggests that there is a difference between the industrial and the postindustrial societies that goes beyond mere measures of income. The reader must remember that exchange rates equate. These countries account for only 16 percent of world population but 82 percent of world GNP. However. for most products. For example. industrialized. They have rising wages and high rates of literacy and advanced education. that lurch’ from one disaster to the next. standardized.536 and $12. the countries in this category reached their present income level through a process of sustained economic growth.986 and $5. social. a market can be defined as a group of people willing and able to buy a particular product. such as Ethiopia and Mozambique. For some products. Other characteristics are the importance of the service sector (more than 50 percent of GNP). for the vast range of industrial and consumer products in international markets today. are those with GNP per capita between $3. respectively.. and political problems that are so serious they make the country unattractive for investment and operations.2 © Copy Right: Rai University . INTERNATIONAL MARKETING The Stages of Economic Development The stages of market development based on GNP per capita correspond with the stages of economic developments. in the 1990s. of intellectual technology over machine technology. also known as advanced. They often bear little relationship to the prices of those goods and services not traded internationally.625. 17 11. respectively. interactive forms of electronic communication. Many of the ‘Countries in this stageMalaysia. The result is civil strife. high-income societies. the prices of internationally traded goods and services.Consumer markets in these countries are expanding. Income and Purchasing Power Parity Around The Golbe When a company charts a plan for global market expansion. Some basket cases are lowincome. or Fire world countries. export-driven economic growth. the PPP per capita GNP is quite different. most companies find it prudent to avoid these countries during active conflict. High-income Countries High countries. income is the single most valuable economic variable. Nevertheless. for example population is a more valuable predictor of market potential than income. $5.822. which form the bulk of the national product in most countries. postindustrial. Unfortunately. Basket cases embroiled in civil wars are dangerous areas. Low and lower-middle income countries are also referred to as less developed countries or LDCs. The per capita GNP for Brazil and Chile are similar. often. LDCs represent an increasingly) competitive threat as they mobilize their relatively cheap-and often highly motivated labor to serve target markets in the rest of the world. what the currency will buy il1 the country of issue) or through direct comparisons of actual prices for a given product. Ownership levels for basic products are extremely high in most households. most marketers tend to stay away from these countries or do business on a limited basis.S dollars at year-end exchange rates. the largest country in Southeast Asia. Indonesia. considerable danger to residents. and highincome countries are referred to as advanced. Alternatively. Upper-middle-income Countries Upper middle-income countries. declining income. This would provide an actual comparison of the standards of living in the countries of the world. The upper middle-income countries. no-growth countries. the single most valuable and important indicator of potential is income. is a good example of an LDC on the move: De p t p l t c lp o l msG Pp rc p t h sr from $250 in sie oiia rbe N e a i a a i e sn 1985 to $1. e. Bell’s thesis is that the sources of innovation in postindustrial societies are derived increasingly from the codification of theoretical knowledge rather than from “random” inventions. Organizations seeking to grow often face a difficult task if they attempt to expand share of existing markets.

Top 10 nations ranked by per capita income and purchasing power parity

2000 GNP Per Capita Income 1. Luxembourg 2. Norway 3. Singapore 4. Switzerland 5. Kuwait 6. Japan 7. Denmark 8. United States 9. Hong Kong 10. Austria $38,587 38,010 36,484 36,479 35,242 34,796 33,894 20,953 27,463 25,854

2000 GNP Income Adjusted for Purchasing Power Parity (PPP) 1.Luxembourg $35,708 2.United States 29,953 3.Singapore 28,648 4. Norway 25,807 5. Hong Kong 24,602 6. Switzerland 24,222 7. Denmark' 23,555 8. Japan 23,353 9. Belgium 22,765 10. Austria 21,787

high-income and large-population countries means that a company can be global-derive a significant proportion of its income from countries at different stages of development-while operating in 10 or fewer countries. For products whose price is low enough, population is a more important variable than income in determining market potential. Although population’ is not s concentrated as income, there is, in terms of size of nations, a pattern of considerable concentration. The 10 most populous countries in the world account for roughly 0 percent of the world’s population today. The 10 most populous countries in the world accounted for
TABLE 2.7 The 10 most populous countries: 2000 with projection to 2020
2000 %of Projected 2000 Population World Population GNP (Thousands) Population 2020 (Millions) 6;134,466 1,268,121 1,15,287 275,746 210,785 170,661 146,866 138,334 129,663 128,454 127,229 100.0 20.7 16.6 4.5 3.4 2.8 2.4 2.3 2.1 2.1 2.1 8,504,642 1,609,796 1,464,902 326,601 286,706 232,130 157,495 242,669 190,792 255,338 137,804 30,578,246 1,179,345 430,09 8,259,358 247,846 850,852 342,008 66,219 47,489 38,416 4,427,104 Per %01 Capita. World GNP GNP 930 424 29,953 1,176 5,535 2,329 479 1,501 299 34,796 100.0 3.9 1.4 27.3 0.7 2.8 1.1 0.2 0.2 0.1 14.6

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Global income and Population

A visit to a mud house in Tanzania will reveal many of the things that money can buy: radios, an iron bed frame, a corrugated metal roof, beer and soft drinks, bicycles; shoes, photographs, and razor blades. What Tanzania’s per capita income of $244 does not-reflect is the fact that instead of utility bills, Tanzanians pave the local well and the sun. Instead of nursing homes, tradition and custom ensure that families will take care of the elderly at home. Instead of expensive doctors and hospitals, villagers can turn to witch doctors and healers. In industrialized countries, a significant portion of national income is generated by taking goods and services that would be free in a poor country and putting a price on them. Thus, the standard of1iving in many countries is often higher than income data might suggest. One researcher has calculated that India, one of the poorest countries in the world, could reach U.S. income levels by growing at an average rate of 5 to 6 percent in real terms for 40 to 50 years. This is no more than the lifetime of an average Indian, and about half the lifetime of an average American. Japan was’ the first country with a non-European heritage to achieve high-income status. This’ was the result of sustained high growth and the ability to acquire knowledge and knowhow, first by making copies of products and then by making improvements. As Japan has dramatically demonstrated, this is a potent formula for catching up and achieving. economic leadership. Today, much more than was true 1,000 years ago, wealth and income are concentrated regionally, nationally, and within nations. The implications of this reality. are crucial for the global marketer. A company that decides to diversify geographically can accomplish this objective by establishing operations in a handful of national markets.

World Total 1. China 2 India 3. United States 4. Indonesia 5, Brazil 6. Russian federation 7. Pakistan 8. Bangladesh 9. Nigeria 10. Japan

People have inhabited the earth for over 2.5 million years. The number of human beings has been small during most of this period. In Christ’s lifetime. There were approximately 300 million people on earth, or roughly one quarter of the number of people on mainland China today. World population increased tremendously during the 18th and 19th centuries, reaching 1 billion by 1850. Between 1850 and 1925, global population had doubled, to 2 billion, and from 1925 to 1960 it had increased to 3 billion. World population is now over 6 billion; at the present rate of growth it will reach 10 billion by the middle of this century. Projections on whether this growth rate will continue or not will have has a dramatic effect on the total future population. Also to consider is that the population is not expanding equally across the globe. Developing countries are expanding much faster than developed countries but the birthrate even in developing countries can vary widely as attitudes toward the number of children, economic development, and diseases change. Simply put, global population will probably double during the lifetime of many students using this textbook. Generally, there is a negative correlation- between population growth rate and income per capita. The lower the income per capita, the higher the rate of population growth and vice versa. In countries such as the United States, Germany, and Japan, the growth rate from 1990 to 1996 was 1 percent or under. Recently, however, some countries in the low-middle and lower-income categories have negative rates of population. These are concentrated in the former republics of the Soviet Union.

The Location of Population
We have already noted the concentration of 72 percent of world income in the Triad(North America, the EU, and Japan) but only 13 percent of the world population. As shown in the table below, in 2000, the 10 most populous countries in the world accounted for 59 percent of world income, and the 5 largest accounted for 48 percent. The concentration of income in the

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Marketing and Economic Development
An important concern in marketing is whether it has any relevance to the process of economic development. Some people believe the field of marketing is relevant only to the conditions that apply in affluent, industrialized countries where the major problem is one of directing society’s resources into ever-changing output or production to satisfy a dynamic marketplace. In the less developed country, the argument goes, the major problem is the allocation of scarce resources toward obvious production needs. Efforts should focus on production and how to increase output, not on customer needs and wants. Conversely, it can be argued that the marketing process of focusing an organization’s resources on environmental opportunities is a process of universal relevance. The role of marketing-to identify people’8 needs and wants, and to focus individual and organizational efforts to respond to these needs and wants : is the same in both low : and high-income countries.

U.S.balance of Payments(1994-1997)

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A. Current Account 1. Goods: Exports FOB 2. Goods: Imports FOB 3. Balance on Goods 4. Services: Credit 5. Services: Debit 6. Balance on Goods and Services B. Capital Account Total A + B

1994 -123.21 504.45 -668.59 -164.14 199.25 -132.45 -97.34 -.60 -123.81

1995 -115.22 577.69 -749.57 -171.88 217.80 -141.98 -96.06 .10 -115.12

1996 -135.44 613.89 -803.32 -189.43 236.71 -152.00 -104.72 .52 -134.91

1997 -155.38 681.27 -877.28 -196.01 256.06 -166.09 -106.04 .16 -155.22

Source: Adapted from Balance of Payments Statistics Yearbook (Washington, DC: The International Monetary Fund, 1998), p. 852.
Japan Balance of Payments (1994-1997)

Economic Risk
Economic development does not always follow a straight upward path. Even in countries with established governments, radical political change often goes hand in hand with drastic economic change. This has a tremendous effect on consumer purchases and how marketers adapt their efforts in these countries. Depending on the gravity of the economic disorder, stagflation to depression, consumers buy fewer, less expensive but more functional products. This is a signal to marketers to adjust pricing and product design ‘accordingly. Recent examples of cases in which marketers had to implement such changes are the countries affected by the Asian Flu. In Southeast Asia in the late 1990s, the Indonesian rupiah fell more than 70 percent against the U.S. dollar, the Thai .baht and Korean won depreciated by 40 to 50 percent, the Malaysian ringgit and Philippine peso lost 40 percent of their value, and the currency in Singapore and Taiwan lost 20 percent as. well. Global market in the region had to adapt their marketing strategies on a countryby-country basis.

1994 A. Current Account 131.64 1. Goods: Exports FOB 385.70 2. Goods: Imports FOB -241.51 3. Balance on Goods 144.19 4. Services: Credit 58.30 5. Services: Debit -106.36 6. Balance on goods and Services 96.13 B. Capital Account -1.85 Total A + B 128.41

1995 111.04 428.72 -296.93 131.79 65.27 -122.63 74.43 -2.23 108.82

1996 65.88 400.28 -316.72 83.56 67.72 -129.96 21.32 -3.29 62.59

1997 94.35 409.24 -307.64 101.60 69.30 -123.45 47.45 -4.05 90.30

Source: Adapted from Balance of Payments Statistics Yearbook (Washington, DC: The International Monetary Fund, 1998), p. 405.

Trade Patterns
Since the end of World War II, world merchandise trade has grown faster than world production. In other words, import and export growth has outpaced the rate of increase in GNP. Moreover, since 1983, foreign direct investment has grown five times faster than world trade and 10 times faster than GNP. The importance of Europe and Central Eurasia-is quite pronounced: They accounted for approximately 60 percent of world exports and imports. Industrialized nations have increased their share of world trade by trading more among themselves and less with the rest of the World. a. Merchandise Trade In 1994, the dollar value of world trade was approximately $4.1 trillion. Seventy-five percent of world exports were generated by industrialized countries, and 25 percent by developing countries. The European Union accounted for 40 percent, the United States and Canada for 18 percent, and Japan for 9 percent. If the EU were considered a single country, its share of world export would be slightly less than that of the United States. Trade growth outside industrialized countries has been slow.

Balance of Payments
The balance of payments. is a record of all of the economic transactions between residents of a country and the rest of the world. The balance of payments is divided into a so-called “current” and “capital” account. The current account is a record of all of the recurring trade in merchandise and service, private gifts, and public aid transactions between countries. The capital account is a record of all long-term direct investment, portfolio investment, and other short- and long-term capital flows. The minus signs signify outflows of cash; for example, in Table 2-8, line A2 shows an outflow of $877 billion that represents payment for U.S. merchandise imports. In general, a country accumulates reserves when the net of its current and capital account transactions shows a surplus; it gives up reserves when the net shows a deficit. The important fact to recognize about the overall balance of payments is that it is always in Balance. Imbalances occur in subsets of the overall balance.

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Key U.S. Trade Information
1998 $ Volume Partners Canada Western Europe Japan Mexico Exports: $ Billion Imports: $ 912 Billion 22% Canada 19% 21% Western Europe 18% 10% Japan 14% 10% Mexico 10% China 7% Total 63% Total 68% Commodities Capital goods Oil and petroleum products Automobiles Machinery Industrial supplies Automobiles Consumer goods Consumer goods Agricultural products Industrial raw materials Food and beverages

b. Servicestrade
Probably the fastest-growing sector of world trade is trade in services. Services include trade and entertainment; education; business services such as engineering, accounting, and legal services; and payments of royalties and license fees. Unfortunately, the statistics and data on trade in services are not as comprehensive as those for merchandise trade. For example, many countries (especially low-income countries) are lax in enforcing international copyrights, protecting intellectual property, and patent laws. As a result, countries that export service products such as software and Video entertainment suffer a loss of service. According to the software publishers association, annual worldwide losses due to software piracy amount to$8 billion. In china and the countries of the former Soviet Union, more than 95 percent of the personal computer software in use in believed to be pirated.
20 Leading Exporters and Importers in World Merchandise Trade-1997

Since World War II, there has been a tremendous interest among nations in economic cooperation. This interest has been stimulated by the success of the European Community, which was itself inspired by the U.S. economy. There are many degrees of economic cooperation, ranging from agreement between two or more nations to reductions of barriers to trade, to the fullscale economic integration of two or more national economies. The best-known preferential arrangement of the early 20th century was the British Commonwealth preference system. This system provided a foundation for trade among the United Kingdom, Canada, Australia, New Zealand, India, and Certain other former British colonies in Africa, Asia, and the Middle East. The decision by the United Kingdom to join the European Economic Community resulted in the demise of this system and illustrates the constantly evolving nature of international economic cooperation. The marketing implications of trade alliances may include harmonization of business requirements such as packaging requirements, a common currency that allows consumers to more easily compare pricing across countries, and economic development that leads to more consumers who can afford to buy more products

INTERNATIONAL MARKETING

Percent Change Leading Leading Exporters 1997 '97/'96 1997 '97/'96 Importers 1. United States 762.8 9.0 1. United States 867.0 8.9 2. Germany 482.4 -2.2 2. Germany 438.9 -1.6 3. Japan 464.4 3.6 3. Japan 304.9 -3.1 4. United 4. China, P. R 287.6 12.9 297.5 6.7 Kingdom 5. France 280.9 -1.0 5. France 270.4 3.5 6. United Kingdom 265.2 6.3 6. Netherlands 204.7 2.5 7. Italy 222.4 -1.8 7. Canada 195.2 13.0 8. Canada 220.1 5.8 8. Italy 190.4 3.8 9. Netherlands 171.3 -.005 9. Hong Kong 186.6 11.0 10.Belgium143.3 1.1 10. China, P. R. 164.6 5.2 Luxembourg 11. Belgium11. Taiwan 135.2 3.6 155 .2 0.2 Luxembourg 12. South Korea 125.0 7.5 12. South Korea 123.2 -4.0 13. Malaysia 115.0 24.0 13. Spain 119.9 3.5 14. Mexico 108.7 16.2 14. Taiwan 103.9 11.3 15. Spain 99.5 3.9 15. Mexico 92.5 25.8 16. Singapore 98.9 1.8 16. Switzerland 87.9 -2.7 17. Switzerland 90.8 -3.9 17. Malaysia 79.3 4.6 18. Sweden 79.1 -1.5 18. Russia 63.6 9.6 19. Russia 82.9 -2.7 19. Brazil 61.2 15.0 20. Saudi Arabia: 67.2 7.3 20. Austria 60.6 -3.5 Source: Adapted from International Monetary Fund, Direction afTrade Statistics (Washington, DC: IMF, 1998), pp. 2-3.

Percent Change

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LESSON 4: ECONOMIC ENVIRONMENT- FOREIGN ECONOMIES
Measuring The Russian Economy
In today’s Russia, average citizens are not the only ones struggling to keep pace with rapid and revolutionary economic change; government statisticians cannot even keep up. The result is that economic information and statistics coming form Russia are inaccurate, inadequate, distorted, and biased. Russia’s main source of economic statistics is an agency called Goskomstat, or the Russian state statistical committee. The inherent problem with the statistics generated by Goskomstat is one of original intent; Historically, Goskomstat measured the state economy of the soviet union the purpose of the statistics that are still used for economic measurement today does not exist anymore because of the change form a planned economy to a market economy. Goskomstat continues to collect data and measure production in the least productive sectors, namely, industries that have not been privatized and farms still owned by the state. If those statistics were somewhat balanced by equivalent numbers from the private sector, Russian GNP might not be so severely underestimated. However, Goskomstat is not at all aggressive about counting the growing private sector in the Russian economy. The growth in Russian joint ventures, retail and service trade, and private banking has been well documented in the press but not by Goskomstat. The problem of gathering data form start up businesses in the emerging private sector is compounded by the fact that those enterprises are reluctant to be included because of potential tax implications. Also, because of inadequate survey techniques, thousands of sole proprietorships, entrepreneurial and barter trade enterprises, as well as informal, black and gray markets are all outside to inflate production numbers to reach goals set by state planners. Even the data generated from the fading state sector are inadequate because organizations on the government dole are not motivated to report any increased production. That enterprise could stand to lose government subsidies if production goes up. Ironically, in the soviet era, managers of state owned businesses were inclined to inflate production numbers to reach goals set by state planners. So what is the impact of the skewed numbers put forth by Goskomstat? The faulty numbers create a ripple effect worldwide. Other agencies that rely on this imperfect source for economic data include the world bank, international monetary fund, US. Department of commerce, the central intelligence Agency (CIA), plus countless banks and 8ndustrial and investment analysis. At the very least, statistics severely understate production, especially in the growing private economy. The estimated amount of underreported production ranges from 25 percent to 60 prevent, with most experts estimating a 45 prevent undercount to be closest to reality. One consequence for the Russian economy is slowed growth because nervous
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investors may be reluctant to enter a market depicted by such bleak numbers.

Degrees of Economic Cooperation
There are four degrees of economic cooperation and integration, as illustrated in table below Free Trade Area A free trade area (FTA) is a group of countries that have agreed to abolish all internal barriers to trade among themselves. Countries that belong to a free trade area can and do trade policies with third countries. A system of certificates of origin is used to avoid trade diversion in favor of low tariff members. The system discourages importing goods in the member country with the lowest tariff for shipment to countries within the area with higher external tariffs. Customs inspectors police the borders between members. The European Economic Area is an FTA that includes the 15nation European Union and Norway, Liechtenstein, and Iceland. The Canada-U.S. Free Trade Area formally came into existence in 1989. In 1992, representatives from the United States, Canada, and Mexico’ concluded negotiations for the North American Free trade Agreement (NAFTA). The agreement approved by both houses of the U.S. Congress and became effective on January 1, 1994. In the 1960s, the Latin Americans responded to European integration moves by forming regional groupings of their own. In Central America, they formed the Central American Common Market; in South America, they formed the Latin American Free Trade Area; the Andean countries broke away from LAFTA to form the Andean Common Market. Unfortunately, none of these groups has made rapid progress. In the early 1990s, the Southern Cone countries (Argentina, Brazil, Paraguay, Uruguay) formed .Mercosur, which has made rapid progress. It is now the most successful and promising regional grouping apart from the EU. During the Vietnam War, a: number of; Southeast Asian nations formed ASEAN (Association of Southeast Asian Nations). ASEAN had political overtones as well as economic goals, but it made only modest progress at economic integration over the next two decades. In 1998, however, the leaders reaffirmed their commitment to achieve an Asian Free Trade Area (AFT A) by 2003. The Asian troubles may affect this. The United States is a member of two free-trade areas, one with Israel and one with Canada and Mexico in NAFTA. NAFTA is very important because it creates a free-trade area of 360 million consumers-as large as the EU-EFTA grouping. As with any regional grouping, NAFTA has encountered some rough spots, but its importance can be seen in the fact that the three member countries are each other’s largest customers and suppliers. There was discussion during the Clinton administration of forming a free trade area of all the Americas, North and South.

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Though there is interest from most countries in the Americas, it is still just an idea on the horizon.
Stage of integration Abolition of Tariffs and Quotas Yes Common Tariff and Quota System Removal of Restrictions on Factor Movements Harmonizati on of Economic, Social, and Regulatory Policies No No No Yes

Free trade area

Customer union Yes Common market Yes Economic union Yes

No Yes Yes Yes

No No Yes Yes

Customs Union Though similar -to a free-trade area in that it has no tariffs on trade among members, a customs union has the more ambitious requirement that members also have a uniform tariff on trade with nonmembers. Thus, a customs union is like a single nation, not only in internal trade, but also in presenting a united front to the rest of the world with its common external tariff. A customs union is more difficult to achieve than a freetrade area because each member must yield its sovereignty in commercial policy matters, not just with member nations but also with the whole world. Its advantage lies in making the economic integration stronger and avoiding the administrative problems of a free-trade area. For example; in a free-trade area, imports of a particular good would always enter the member country with the lowest tariff on that good, regardless of the country of destination. To avoid this perversion of trade patterns, special regulations are necessary. The leading example of a customs union is the EU. Although the EU is often referred to as the Common Market, it is more accurately described as a customs union. In July 1968, the EU achieved a full customs union, a goal toward which member nations had been working since January 1, 1958. Though this is a slower timetable than that of EFTA, it represents a much more ambitious endeavor because it includes not only a freetrade area among members but also a common external tariff. In addition, it covers agricultural products, which were omitted by EFTA. A customs union represents the logical evolution of an FTA. In addition to eliminating the internal barriers to trade, members of a customs. union agree to the establishment ‘of common external barriers. The Central American Common Market, Southern Cone Common Market (Mercosur), and the Andean Group are all examples of customs unions. Common Market A common market goes beyond the removal of internal barriers to trade and the establishment of common external barriers to the important next stage of eliminating the barriers to the flow of factors (labor and capital) within the market. A common area builds on the elimination of the internal tariff barriers and the establishment of common external barriers. It seeks to coordinate economic and social policy within the market to allow free flow of capital and labor from country to country. Thus, a common market creates an open market not only for goods but also for services and capital.

A true common market includes a customs union but goes significantly beyond it because it seeks to standardize or harmonize all government regulations affecting trade. These include all aspects of government policy that pertain to business-for example, corporation and excise taxes, labor laws, fringe benefits and social security programs, incorporation laws, and antitrust laws. In such an economic union, business and trade decisions would be unaffected by the national laws of different members because they would be uniform. The United States is the closest example of a common market. Even here, however, the example is not perfect, because different states do have different laws and taxes pertaining to business. U.S. business decisions, therefore, are solve what influenced by differing state laws. The EU is the best contemporary example of a common market in formation. It always had the goal of achieving such status, but what it achieved earlier was actually a customs union with a few extra dimensions. What was exciting about 1992 was the member states undertaking 300 new directives to reach a true common market by harmonizing the different national regulations in 12 member countries. Even though this goal was not reached fully by 1992, great strides. toward market integration were made. The fact that 300 directives were still necessary 30 years after forming the EU shows how difficult and complex it is to form a true common market. The Single Market continues in Europe with two major new steps. One is the monetary union with the Euro as the new single currency for most member countries. The second is the coming addition of five new members front Central Europe. However, given the fact that the EU members have multiple languages, as well as diverse cultures, histories, and legal systems, it is not surprising that they continue to have trouble emulating common market environment of the much more homogeneous United States. Economic Union The full evolution of an economic union would involve the creation of a unified central bank; the use of a single currency; and common policies on agriculture, social services and welfare, regional development, transport, taxation, competition and mergers, construction and building, and so on. A fully developed economic union requires extensive political unity, which makes it similar to a nation. The further integration of nations that were members of fully developed economic unions would be the formation of a central government that would bring together independent political states into a single political framework. The European Union (EU) is approaching its target of completing most of the steps required to create a full economic union, but major hurdles remain.

INTERNATIONAL MARKETING

The World Trade Organization and Gatt
The year 1997 marked the 50th anniversary of the GAIT, a treaty among 123 nations whose governments agreed, at least in principle, to promote trade among members. GAIT was intended to be a multilateral, global initiative, and GAIT negotiators did, indeed, succeed in liberalizing world merchandise trade. It “was also an organization that had handled 300 trade disputes-many involving food - during its half century of
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existence. GAIT itself had no enforcement power (the losing party in a dispute was entitled to ignore the ruling), and the process of dealing with disputes sometime stretched on for years. Little wonder, then, that some critics referred to GATT as the “ general agreement to talk and talk.” The successor to GATT, the World Trade Organization (WTO), came into existence on January 1,1995. From its base in Geneva, the WTO provides a forum for trade-related negotiations. The WTO’s staff of neutral trade experts will also serve as mediators in global trade disputes. The WTO had a Dispute Settlement Body (DSB) that mediates complaints about unfair trade barriers and other issues between WTO member countries. During a 60-day consultation period, parties to a complaint are expected to engage in good-faith negotiations and reach an amicable resolution. Failing that, the complainant can ask the DSB to appoint a three-member panel of trade experts to hear the case behind closed doors. After convening, the panel has 9 months within which to issue its ruling. The DSB is empowered to action the panel’s recommendations. The losing party has the option of turning to a seven-member appellate body. If, after due process, trade policies are found to violate WTO rules, the country is expected to change those policies if changes are not forthcoming, the WTO can authorize trade sanctions against the loser. One of the WTO’s first major tasks was hosting negotiationson the General Agreement on Trade in Services, in which 76 signatories made binding market access commitments in banking, securities, and insurance. The WTO faced its first real test when representatives from the United States and Japan met in 1995 to try to resolve a dispute over Washington’s claims that Japan engaged in unfair trade practices that limited imports of U.S. car parts. The Clinton administration was responding to the fact that one third of the U.S. merchandise trade deficit-$66 billion in 1994 alone-is with Japan. Moreover, cars and auto parts accounted for approximately two thirds of that $66 billion. In the spring of 1995, the United States threatened to slap 100 percent tariffs on 13 models of cars imported from Japan. Japan formally filed a complaint with the WTO to object to the tariffs; although a trade war was narrowly averted at the last moment, trade-related tensions between- the two countries continue to simmer. Trade tensions flared up again in 1"998 as the United States threatened to slap 100 percent tariffs on European imports such as Italian hams and bed linens. The United States was acting in response to Europe’s banana import quota system.” Still, it remains to be seen whether the WTO will live up to expectations regarding additional major policy initiatives on such issues as competition of foreign investment. One problem IS that politicians in many countries are resisting the WTO’s plans to move swiftly in removing trade barriers. A Norwegian trade group told reporters that the WTO’s motto should be, “If you can decide it tomorrow, why decide it today?” Still, as Director General Renato Ruggiero said recently, “Free trade is a process that cannot be stopped.”

are seeking to lower barriers to trade within their regions. The following section describes the major regional economic cooperation agreements. The trade groups listed next are divided geographically into the European, North American, Asian, South and Latin American, and African and Middle Eastern trade groups. 1. European Trade Groups The European Union (formerly known as the European Community [EC]) was established by the Treaty of Rame in 1958. The six original members were Belgium, France, Holland, Italy, Luxembourg, and West Germany. In 1973, Britain, Denmark, and Ireland were admitted, followed by Greece in 1981 and’ Spain and Portugal in 1986. The three newest members, Finland, Sweden, and Austria joined in 1995. (In 1994, voters in Norway rejected a membership proposal.) today, the 15 nations of the EU represent 378 million people, a combined GNP of $8.3 trillion, and 28 percent of world GNP. Beginning in 1987, the 12 countries that were EC members at that time set about the difficult task of creating a genuine single market in goods, services, and capital. Completing the singlemarket program by year-end 1992 was a major EC achievement; the Council of Ministers adopted 282 pieces of legislation and regulations to make the single market a reality. Now, citizens of the 15 countries are able to freely cross borders within the EU. How have companies responded to the movement in the EU toward a single market? In a series of surveys carried out in 1973,1983, and 1993, Boddewyn and Grosse found that there was a growing standardization of marketing policies by U.S. firms in the EU from its inception in 1958 to the early 1980s followed by a return to greater adaptation. The obstacles to standardization mentioned by respondents include differences in tastes and habits and national government regulations for consumer products, as well as nationalistic feelings and government regulations for industrial goods. These findings suggest that the EU effort to achieve greater harmonization has some distance to go. Under provisions of the Maastricht Treaty, the EU is working to create an economic and monetary union (EMU) that will include a European Central Bank and a single European currency. Implementation of the EMU will require working out the extent to which countries sharing a currency need to coordinate taxes and budgets. A single currency would eliminate costs associated with currency conversion and exchange rate uncertainty. It would also make it easier for consumers in the various participating countries to compare pricing of goods and services. Member countries recognize that the use of multiple currencies in the EU is a source, of economic “drag” on their economy, but they also realize that the adoption, of a single currency would expose the member countries to economic risks that the countries do not face when operating with separate currencies. There is also the realization that having a currency is a key element of national control and in the end is what distinguishes a nation from a sub national unit of political organization. Countries have currencies, and states or provinces do not. Since the EU members adopted a single currency, they no longer can control the inflation and interest rates, the two key levers of monetary policy, which are key tools of any
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Regional Economic Organizations
In addition to the multilateral initiatives of the World Trade Organization (WTO), countries in each of the world’s regions
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sovereign for controlling its economic destiny. Britain, Denmark, Greece, and Sweden, are not currently participating in the single currency, which will not assume a cash form until 2002. Further EU enlargement has become a major issue with 12 countries having been accepted as applicants. The list of applicants is divided into several categories. The Economist estimates that Hungary, Poland, and Cyprus may become full members by 2003; Estonia, Malta, Czech Republic, and Latvia in 2004; Slovenia, Lithuania, and Slovakia in 2005; Bulgaria and Romania in 2008; and Turkey in 2011.16 In theory, economic development should be the main criteria for entry; however, many political issues are also involved in making the decision for admission into the EU.
The Lome Convention

2. North American Trade Group
North American, Free Trade Agreement

INTERNATIONAL MARKETING

In 1988, the United States signed a free trade agreement with Canada (U.S.-Canada Free Trade Agreement, or CFTA), the scope of which was enlarged in 1993 to include Mexico. The resulting free trade area had a 2000 population of 406.7 million and a gross National product of $9.3 trillion. All three governments will promote economic growth through expanded trade and investment. The benefits of continental free trade will enable all three countries to meet the economic challenges of the decades to come. The gradual elimination of barriers to the flow of goods, services, and investment, coupled with strong intellectual property rights protection (patents, trademarks, and copyrights), will benefit businesses, workers, farmers, and consumer. 3. Asian Trade Groups
Asia -Pacific Economic Cooperation

The EU maintains an accord with 70 countries in Africa, the Caribbean, and the Pacific (ACP). The Lome Convention was designed to promote trade and provide poor countries with financial assistance from the European Development Fund. Recently, budget pressures at home have prompted some EU nations to push for cuts in Lome aid.
European Economic Area

In 1991, after 14 months of negotiations, the European Economic Community and the seven nations European free Trade Association (EFTA) reached agreement on the creation of the European Economic Area (EEA) beginning January 1993. Although the goal was to achieve the free movement of goods, services, capital, and labor between the two groups, the EEA is a free trade area, not a customs union with common external tariffs. With Austria, Finland, and Sweden now members of the EU, Norway, Iceland, and Liechtenstein are the sole remnants of the EFTA that are not EU members (Switzerland voted-not to be part of the EEA). The EEA is the world’s largest trading bloc, with 383 million consumers and $8.5 trillion combined GNP. )
Central European Free Trade Association

Each member of each year representatives of 18 countries that border on the Pacific Ocean meet formally to discuss prospects for liberalizing trade. Collectively, the countries that make up the Asia-Pacific Economic Cooperation (APEC) forum account for 38 percent of world population and 52 percent of world GNP. APEC provides a chance for annual discussions by people at various levels: academics and business executives, ministers, and heads of state. Much debate among APEC members has centered on whether all trade barriers in Asia can be eliminated, without exception, by the year 2020. In 1997, the APEC meeting in Vancouver, British Columbia, faced a surprising challenge: the so-called Asian Flu financial crisis that began in Thailand and quickly spread to Malaysia, Indonesia, Korea, and even Japan. This crisis, caused by careless lending and borrowing practices in the private sectors of these countries, led to a crisis in investor confidence in security values, which led to a collapse in prices in equity markets, a major decline in currency values, and a massive increase in exports from countries in the region to the United States. The entire world was caught off guard by this crisis, which underlined the fact that lending and banking practices in the region had become quite “loose” and sloppy. The world realized that the Asian “miracle” had some major deficiencies that needed to be repaired. These repairs presented a challenge to the world economy: how to fix the problems in Asia without spreading the “flu” to the rest of the world. It was clear to economists that as long as the economic leaders of the high-income countries of the world did not allow aggregate demand in their markets to collapse or trade barriers to be imposed it would be possible for the countries in the Asian region to clean house. This would require ending the traditional close relationship that had existed in many countries between business and government and the establishment of a more rigorous system of private sector responsibility for investment decision.

The transition in Central and Eastern Europe from command to market economies led To the demise, in 1991, of the Council for Mutual Economic Assistance. COMECON (or CMEA, -as it was also known) was a group of communist bloc countries allied with the Soviet Union. In 1992, Hungary, Poland and Czechoslovakia signed an agreement creating the Central European Free Trade Association (CEFTA). The signatories, pledged cooperation in a number of areas, including infrastructure and telecommunications, sub regional projects, interenterprise cooperation, and tourism and retail trade.17 Romania, Slovenia, and the two countries created by the division of Czechoslovakia- Czech Republic and Slovakia –are also CEFTA members. Meanwhile, within the Commonwealth of Independent States, formal economic integration between the former Soviet republics is proceeding slowly. In 1995, the governments of Russia and Belarus agreed to form a customs union and remove border posts between their two countries.

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Association of Southeast Asian Nations

The Association of Southeast Asian Nations (ASEAN) is an organization for economic, political, social, and cultural cooperation among its 10 member countries: Brunei, Cambodia, Indonesia, Laos, Malaysia, MyaI1mar, the Philippines, Singapore, Thailand, and Vietnam. ASEAN (pronounced OZZIE-on) was established in 1967 with the signing of the Bangkok Declaration. Vietnam became the first communist nation in the group when it was admitted in 1995. Cambodia and Laos were admitted to ASEAN in Myanmar joined in 1998.The countries have agreed to eliminate most tariffs by 2010). The ASEAN group has 495 million people and a GNP of $700 billion. A constant problem is the strict need for Consensus among all members before proceeding with any form of cooperative effort. Although the 10 countries of ASEAN are geographically close, they have historically been divided in many respects. 4. South And Central American Trade Groups
Andean Group

bean Community is 14 million. The total population is 112,000 and has a GNP of $209 million or per capita GNP of $1,866. The Caribbean Community’s main activity is economic integration by means of a Caribbean Common Market. CARlCOM has created a customs union with common tariffs on imports from third countries, cross-listed stocks on the various changes, created a Caribbean Court of Justice to deal with economic issues and trade disputes, and is working toward a common currency.
Central American Integration System (SICA)

INTERNATIONAL MARKETING

The Andean Group was formed in 1969 to accelerate development of its member states-Bolivia, Colombia, Ecuador, Peru, and Venezuela-through economic and social integration. Members agreed to lower tariffs on intragroup trade and work together to decide what products each country should produce. At the same time, foreign goods and companies were kept out as much as possible. In 1988, the group members decided to get a fresh start. Beginning in 1992, the Andean Pact signatories agreed to form Latin America’s first operating sub regional free trade zone. More than 100 million consumers would be affected by the pact, which abolished all foreign exchange, financial and fiscal incentives, and export subsidies at the end of 1992. Common external tariffs were established, marking the transition to a true customs union. A high-level commission was created to look into any alleged unfair trade practices among countries.
Southern Cone Common Market

Central America is trying to revive its common market, which was set up in the 1960s. It collapsed in 1969 when war broke out between Honduras and EI Salvador after a riot at a soccer match betweet1 teams from the two countries. The five members-EI Salvador, Honduras, Guatemala, Nicaragua, and Costa Rica-decided in 1991 to reestablish the common market by 1994. Efforts to improve regional integration gained momentum with the granting of observer status to Panama. In 1997, with Panama as a member, the group’s name was changed to Central American Integration System.
Free Trade Area of the Americas

One of the biggest issues pertaining to trade in the Western Hemisphere is the Free Trade Area of the Americas (FTAA). The idea was formally proposed in 1994 by U.S. President Bill Clinton during a summit of heads of state in Miami. Meeting in Brazil in May 1997, trade ministers from the 34 participating countries agreed to create “preparatory committees” in anticipation of formal talks that would begin in 1998. The Clinton administration was keen to open the region’s fast-growing big emerging markets (BEM) countries to U.S. companies. In particular, the president wanted talks to focus immediately on tariffs and “early harvest” agreements on individual industry sectors, such as information technology. When the second Summit of the Americas was held in Santiago, Chile, in April 1998, the FTAA was formally launched. However, it was also clear that fast track authority would be essential to successfully concluding the negotiations. Mean. While, Mercosur, CARlCOM, SICA, and the Andean Community intend to pursue further integration among themselves, as well as with Europe. 5. African and Middle Eastern Trade Groups The Treaty of Lagos establishing the Economic Community of West African States {ECOWAS) was signed in May 1975 by 16 states, with the object of promoting trade, cooperation, and self-reliance in West Africa. The members are Benin, Burkina Faso, Cape Verde, the Gambia, Ghana, Guinea, Guinea-Bissau, the Ivory’ Coast, Liberia, Mali, Mauritania, Niger, Nigeria, Senegal, Sierra Leone, and Togo. The total population of ECOWAS is 300 million and total GNP is $254 million for a per capita GNP of $846. In 1980, the member countries agreed to establish a free trade area for unprocessed agricultural products and handicrafts. Tariffs on industrial goods were also to be abolished; however, there were implementation delays. By January 1990, tariffs on 25 items manufactured in ECOWAS member states had been eliminated. The organization installed a computer system to

Argentina, Brazil, Paraguay, and Uruguay (Figure 2-8)-with a combined population of 32 million people, a GNP of $1,332 billion or a per capita GNP of $5,741 in 2000 : agreed in 1991 to form a customs union known as the Southern Cone Common Market (in Spanish, Mercado del Sur, or Mercosur). In 1996, while became an associate member. Chile chose not to become a full member because it already had lower external tariffs than the rest of Mercosur; full membership would have required raising them. Presently, Chile has been negotiating for membership in NAFTA.
Caribbean Community and Common Market

The Caribbean Community and Common Market (CARICOM) were formed in 1973 as a movement toward unity in the Caribbean. It replaced the Caribbean Free Trade association (CARIFTA) founded in 1965. The members are Antigua and Barbuda, the Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Haiti, Jamaica, Monterrey, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines, Surinam, and Trinidad and Tobago. The population of the entire IS-member Carib-

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and Uganda ECOWAS (Economic Community of West African States): Benin.process customs and trade statistics and to calculate the loss of revenue resulting from the liberalization of intercommunity trade. Gambia. a regional stock market. and the United States. South Africa. The organization provides” a means of realizing coordination. Mexico. and Turkey SICA: EI Salvador. Thailand. Iceland. East African Cooperation Treaty INTERNATIONAL MARKETING APEC (Asia Pacific Economic Cooperation): Australia. Mauritania. Finland. New Zealand. Guatemala. The real impediment to trade has been SADCC’s poverty. Thailand. The World Bank indicates that combined 2000 gross national product (GNP) for the 14 member nations amounted to $174 million. Georgia. a new attempt has been made and the result is that Kenya. and Uganda have signed an agreement forming the East African Cooperation Treaty. efforts to organize the countries of East Africa failed for several reasons. The members are Angola. Jordan. Papua New Guinea. Norway.625. Canada. ACC. France. Sweden. Mauritania. Pakistan. Japan. Ecuador. The newer organizations are more promising than the Arab League. New Zealand. Saint Vincent and the Grenadines. Saudi Arabia. and the Arab Cooperation Council (ACC) consists of Egypt. Sierrg Leone. petroleum. Denmark. Sudan. the Arab Maghreb Union ‘(AMU) consists of Morocco. Colombia. and AMU-as embryonic economic communities that will foster the development of inter-Arab trade and investment. which is unlikely before 2005. Zambia. and Upper Volta EU (European Union): Austria. Colombia. and Venezuela LAIA (Latin American Integration Association): Argentina. . Tanzania. Arab Maghreb Union and Arab Cooperation Council In 1989. Sweden.2 . China. and United Arab Emirates. Liechtenstein. In a move to a common currency. Cooperation Council for the Arab States of the Gulf The organization generally known as the Gulf Cooperation Council (GCC) was established in 1981 by six Arab statesBahrain. Niger. Indonesia. Qatar. Iraq. Ivory Coast. Jamaica. Honduras. Japan. The total population of SADCC is 216 million for a per capita GNP of $805. Today. Libya. Togo. and Yemen. Bolivia. Mali. Mali. and Uzbekistan East Africa Customs Union: Ethiopia. Kirgizstan. Iceland. Belize. Switzerland. Swaziland. Congo. integration. Ivory Coast. and the United Kingdom EEA (European Economic Area): Iceland. and Switzerland Group of Three: Colombia. Modeled after the EU. Nigeria. and harmonization of laws. Malawi. Tanzania. RCD (Regional Cooperation for Development): Iran. Kazakhstan. the Congo. and Gabon CARICOM (Caribbean Common Market): Antigua and Barbuda. Many Arabs see their regional groups-the GCC. Malaysia. and the United States OECD (Organization for Economic Cooperation and Development): EU members. It is difficult to provide GNP numbers for the GCC as economic data are not provided for several of the countries. and Luxembourg CAEMC (Central African Economic and Monetary Community): Cameroon. Peru. Sudan. Indonesia. and Libya. the Netherlands. Chinese Taipei (Taiwan). Syria. the abolition of customs duties. Grenada. Italy. Mauritius. Belarus. and uniform petroleum policies and prices. Liberia. Norway. and Vietnam. AFTA (ASEAN Free Trade Area): ASEAN members Andean Group (the Cartagena Agreement): Bolivia. Seychelles. it already has a common passport and is working toward a common currency. and cultural affairs. and Venezuela Mahgreb Economic Community: Algeria. Luxembourg. CFA Franc Zone: the Comoros. two other organizations were established. Paraguay. Mexico. Ghana. Tajikistan. Namibia. and the United States Arab Middle East Arab Common Market: UAR. the Philippines. Uruguay. Da-homey. Given the trend toward gloating. Malaysia. and Trinidad and Tobago Central American Community: Costa Rica. Belgium. Chile. the Netherlands. Canada. Tunisia. Senegal. Mexico. which consists of 21 member states and a constitution that requires unanimous decisions. GCC committees coordinate trade development in the region. and Zimbabwe. Paraguay. Nicaragua. Oman. the Philippines. Senegal. Brazil. Finland. Barbados. Saint Lucia. Gulf finance ministers drew up an economic cooperation agreement covering investment. Mozambique. Guinea-Bissau. Mexico. Russia. Germany. and Yemen ASEAN (Association of Southeast Asian Nations): Brunei. Bahamas. Kenya. and cooperation in all economic. Greece. Honduras. Azerbaijan. Spain. Guatemala. Portugal. Turkey. and EU members EFTA (European Free Trade Association): Austria. Niger. Chad. Brunei. Burkina Faso. Cape Verde. Korea. Lesotho. and Uruguay NAFTA (North American Free Trade Agreement): Canada. agricultural policy. Guinea. Tunisia. and Panama. Saint Christopher-Nevis. harmonization of banking regulations. and financial and monetary coordination. and Venezuela ANZCERTA (Australia-New Zealand Closer Economic Relations Trade Agreement): Australia and New Zealand 26 © Copy Right: Rai University 11. Zimbabwe. Algeria. social. an ECOWAS traveler’s check was initiated in 1999 for purchase by citizens of the member countries. members of the WAEMU. and Morocco Mercosur (Southern Common Market): Argentina. Chile. Botswana. Ecuador. Kuwait. Peru. Nor-way. and members of the CAEMC CIS (Commonwealth of Independent States): Armenia. Ireland. During the 1960s and 1970s. Dominica. Singapore. and Togo. industrial strategy. Iraq. Montserrat. the Cen-tral African Republic. Ukraine. Australia. Jordan. Turkmenistan. Singapore. and Nicaragua WAEMU (West African Economic and Monetary Union): Benin. EI Salvador. Guyana. Equatorial Guinea. The south African Development Coordination Conference (SADCC) was set up in 1980 by the region’s black-ruled states to promote trade and cooperation. a figure that is even lower than the GNP of Denmark. Tanzania. Moldova. Benelux Customs Union: Belgium. Brazil. Hong Kong.

Just as most firms do not go for complete vertical integration but buy many materials and supplies from outside firms.2 © Copy Right: Rai University . The firm that decides whether to make or buy also considers price as a principal variable. Empirical studies have demonstrated the validity of the model for some kinds of manufactured goods. Thus. According to this concept. in Smith’s example. Product Life Cycle A recent refinement in trade theory is related to the product life cycle. with the United States as an example.the same “make or buy” decision. knowledge of the basic causes and nature of international trade is important. land and climate) than does England. Applied to the international picture. export strength is evident. that is. An examination of the exports and imports of most nations tends to support this theory. Smith’s major conclusion was that the wealth of nations derived from the division of labor and specialization. When applied to international trade theory. a brief survey of international trade will prove useful. Trading between groups has been going on since the beginning of recorded history. Foreign production starts.INTERNATIONAL MARKETING LESSON 5: INTERNATIONAL TRADE THEORY The learning objective of this lesson are: 1. For the international marketer. Comparative Advantage It has been said that price differences are the immediate basis of international trade. it is possible to predict what goods a nation will export and import. Foreign production becomes competitive in export markets. a nation can buy some goods more cheaply from other nations than it can make them itself. International monetary financial systems. and cultural reasons. he noted that grapes could be grown “under glass” (in greenhouses) in England but that to do so would lead to England’s having both less wine and fewer 11. manufacturers than if it specialized in manufacturers. U. then loses its export markets. Much early trade was economically motivated and conducted through barter or commercial transactions. a large part of the exchange of goods historically occurred through military conquest: “ To the victor belong the spoils. An example given by Adam Smith helps illustrate this: In discussing the advantages to England in trading manufactured goods for Portugal’s wine. An overview of the world trade 2. We’ll assume a U. the firm must understand them. international trade theory seeks the answers to a few basic questions: Why do nations trade? What goods do they trade? Nations trade for economic. that a country tends to produce and export those goods in which it has the greater comparative advantage (or the least comparative disadvantage) and import those goods in which it has the least comparative advantage (or the greatest comparative disadvantage). and finally may become an importer of the product. 3. In a sense. And why do countries have different costs? The Swedish economist Bertil Ohlin came up with an explanation generally held to be valid: Different countries have dissimilar prices and costs on goods because different goods require a different mix of factors in their production and because countries differ in their supply of these factors. so most nations decide against complete selfsufficiency (or autarky) in favor of buying cheaper goods from other countries. On this basis. this means trade rather than selfsufficiency.S. Portugal’s wine would be cheaper than wine made in England because Portugal has a relatively better endowment of winemaking factors (for example. but the principal economic basis for international trade is difference in price. Essentially.” The predominant pattern of international trade is the voluntary exchange of goods and services. Outlined below are the four phases in the production and trade cycle. however.625. As Smith suggested. Usefulness of data on balance of payments. However. many products go through a trade cycle wherein one nation is initially an exporter. as does the firm. political. Phase 1. Phase 3. Nation Trades With Nation Although our primary concern is international marketing rather than international trade. Phase 2. What we have been discussing is the principle of comparative advantage. firm has come up with a high-tech product. 27 The International Environment of Marketing Foreign Market A Home Country Firm Foreign Market B Foreign Market C International Trade Theory In domestic marketing. the nation faces .S. namely. the nation maximizes its supply of goods by concentrating production where it is most efficient. which in marketing refers to the consumption pattern for a product. To work with them. It is easier for a firm to work with the underlying economic forces than against them. and trading some of these products for imported products where it is least efficient. In fact. it refers primarily to international trade and production patterns. But why do nations have different prices on goods? Prices differ because countries producing these goods have different costs. much emphasis is placed on the analysis of buyer behavior and motivation.

or payments. The firm’s pricing policies. If the exporting firm fears devaluation of a currency. firm trying to sell in the French market faces certain handicaps deriving from the French government’s control over its trade. the balance of payments is an important information source. Please note. innovator. If the nation is steadily losing its gold and foreign exchange reserves. If the firm cannot repatriate profits from a country. they vary in the degree of such control each nation invariably establishes laws that favor its nationals and discriminate against traders from other countries. and commercial policies. Furthermore. too. Textiles in general are an example of a product in Phase 4. the firm may have difficulty getting foreign exchange to repatriate profits-’or even to import its products. gaining its profits elsewhere where it can repatriate them. policymakers plan monetary.S. producers in wealthy countries begin producing the product for their own markets. In Phase 1. seizing on its first-mover advantages. Its data help government Commercial Policy One reason international trade is different from domestic trade is that it is carried on between different political units. the balance of payments is often broken down into a current account and one or more capital accounts. These are summary statements of all the economic transactions between one country and all other countries over a period of time. fiscal. importing countries gain familiarity with the new product. especially the movement of goods reflected in that account.625. (We will assume the European producers have now taken away the home market of the original U. meaning that the government . firm are in addition to any disadvantages 11. (We assume that the U. they export to third-country markets. the foreign producers now have sufficient production experience and economies of scale to allow them to export back to the innovator’s home country. put. This modification of the theory of comparative advantage provides further insight into patterns of international trade and production and helps the international company plan logistics. such as when it will need to produce—or source – abroad. preferring to give terms in its home currency or another “safe” currency. firm’s export markets there. (We assume the U. as the firm moves’ down the production learning curve. A nation’s international solvency can be evaluated by checking its capital account over several years.2 28 © Copy Right: Rai University . there is a strong-likelihood of a currency devaluation or some kind of exchange control. The capital account includes international financial transactions. each one a sovereign nation exercising control over its own trade. The new product is produce in the home market because. that is. product innovation is likely to be related to the needs of the home market. lending.” The product may become so standardized by Phase 4 that it almost becomes commodity. The firm can thus identify its own best import and export targets that are. Such data can also provide information for decisions in international marketing.restricts the amount of money sent out of the country as well as the uses to which it can be. This means. The firm usually serves its home market first. replacing the innovator’s exports there. Although all nations control their foreign trade. firm is exporting to Europe. With exchange ‘Control. In governmental reporting. usually one year. The international marketer usually is more interested in the details of current account transactions. are affected by the balance ofpayments problems of the host country. (We assume that European firms are now exporting to Latin America. it tries to use its transfer pricing to minimize the profits earned in that country.S. that a U. the firm can get an indication of the competition in these countries by noting the nations supplying the products in question. it hesitates to quote prices in that currency. INTERNATIONAL MARKETING Balance of Payments In the study of international trade. Europe.S. the principal source of information is the balance of-payments statement of the trading nations.) In Phase 4.) Foreign production will reduce the exports of the innovating firm. The current account is a record of all the goods and services the nation exchanged with other nations. If the firm is importing products that are not considered necessary.) In Phase 1 the product is “new. foreign firms gain production experience and move down the cost curve.) In Phase 3. for example. The statistics sometimes even permit identification of low-price supplying nations and high-price (high. Products. A look at the capital account is also useful. though. If they have lower costs than the innovating firm. we have considered primarily the current account in the balance of payments.Phase 4. Thus.Import competition begins. which is frequently the case. These handicaps to the U.S. Balance-ofpayments analysis can show which nations are importers and exporters of the products in question. Longitudinal analysis of the balance of payments can help to track the international product life cycle. for both international marketing and international finance. in Phase 4 may be produced in less developed countries for export to the developed countries. Financial Considerations Up to now. firm’s exports to Europe are replaced by production within. taking away the U. Two important decisions for a firm are the choice of location of supply for foreign markets and the selection of markets to sell to. When the firm is considering foreign market opportunities. the scarce foreign exchange will go instead to goods on which the nation places a higher priority. it finds a country’s import statistics for its products to be a preliminary indicator of market potential.of-payments data requires that a period of several years be considered to get an idea of trends. Marketing Decisions The balance of payments is an indicator of the international economic health of a country. such as private foreign investment and government borrowing.” In Phase 2 it is “maturing. As it begins to fill home-market needs. it needs to communicate with both suppliers and customers. foreign exchange.” In Phases 3 and 4 it is “standardized. the nature of the goods being traded and their origin and destination./quality?) suppliers.S.) In Phase 2. that the use of balance. Gradually.S. countries to sell to and countries to supply from. the firm begins to export the new product. (Most product innovations begin in one rich country and then move to other: rich countries.

The importing country employs a tariff differential to promote local employment. Its goal is rather the conservation of scarce foreign exchange and/or the protection of local production in the product lines affected. In 1989. Since the latter is in accord with the wishes of government the firm might be regarded favorably for taking such action. A tariff levied on quantity is called a specific duty and is used especially for primary commodities.2 © Copy Right: Rai University 29 . thereby earning high profits. The manufacturer might be able to adapt its product to meet the lower tariff. Each of these will be discussed in turn as it relates to the task of the international marketer. it’ penalizes its producers that import raw materials or components. are barriers to imports. as foreign investment decisions. The firms exporting to that nation must also be on the government’s favored list. Tariffs A tariff is a tax on products imported from other countries. In turn.625. They set absolute limits on the amount of goods that may enter the country. the firm may seek to turn the tariff to its own advantage. For many years. Another way the manufacturer can minimize their tariff burden is to ship products completely knocked down (CKD) for assembly in the local market. A greater emphasis on marginal cost pricing could result. Today. Price or product modifications do not get around quotas the way they might get around tariffs. the protective purpose generally prevails. and distribution policies of the international marketer as well. The principal tools of commercial policy are tariffs. gallon. a company wishing to buy goods from abroad must buy its foreign exchange from the control agency. One could argue that with a tariff. A national company earning foreign exchange from its exports must sell this foreign exchange to the control agency. Assume that the host country is exerting pressure for local manufacture that will be noncompetitive with existing sources. product.pieces at one rate or as jewelry at a higher rate. When the United States was a new nation. Customs Service ruled that the Suzuki Samurai and most small vans would be classified as “trucks” subject to a 25 percent tariff rather than as “cars. Governments may have two purposes in imposing tariffs: They may wish to earn revenue and/or make foreign goods more expensive in order to protect national producers. The positive side of the ruling was that this would allow more “car” imports by the Japanese (to replace the vehicles reclassified as trucks).resulting from distance or cultural differences. Otherwise they will lose their market if importers can get no foreign INTERNATIONAL MARKETING 11. quotas. Japanese producers responded in two ways: ((1) They exported more expensive cars with higher margins. or quotas. the U.S. Thus. a country penalizes its consumers by making them pay higher prices on imported goods. Firms in the country have to be on the government’s favored list to get ex-change for imported supplies. the tariff increases the price of its product and reduces competitiveness in that market. however. It would seek this protection as an “infant industry” against mature companies abroad. firms selling in their home market. Alternatively. The firm might acquiesce on the condition that the plant it sets up be protected by tariffs imposed against more efficient outside suppliers. running the risk of higher costs and indifferent quality control. An import quota can be a more serious restriction than a tariff because the firm has less flexibility in responding to it. most government revenues came from tariffs. The product may be modified or stripped down to lower that price or to get a more favorable tariff classification. the French firm trying to sell in the United States faces similar restrictions when competing with U. exchange control. If the firm is supplying a market -by -exports. Exchange Control The most complete tool for regulation of foreign trade is exchange control. For example.” subject to a 2. It gets none. they may try to develop local suppliers. the phenomenon would result in complete local production rather than just assembly. This necessitates a price structure that minimizes the tariff barrier.S. the term used when the primary reason a local plant exists is to get behind the tariff barrier to protect markets that a firm can no longer serve with direct exports. and administrative regulation (the “invisible tariff “). Ad valorem duties are generally levied on manufactured products. Exchange control means that foreign exchange is scarce and that the government is rationing it out according to its own priorities. Tariffs affect pricing. This examination of price is accompanied by a review of other aspects of the firm’s approach to the market. The Japanese auto companies in the United States illustrate problems firms have with quotas. The rationale is that a policy that is too liberal with imports may hurt employment in that countries own industries. Many less developed countries today earn a large amount of their revenue from tariffs because they are among the easiest taxes to collect. In some circumstances. American auto firms applauded the decision but the Japanese (and European) producers complained. Commercial policy is the term used to refer to government regulations bearing on foreign trade. if the firm becomes a local con1pany it may benefit from the tariff protection. or yard-or on the value of the imported goodssuch as 1 0 or 20 percent ad valorem.5 percent duty. the United States had a “voluntary” quota on Japanese car imports. quota constraints. Quotas Quantitative restrictions. watches could be taxed either as time. About the only response the firm can take to a quota is to assure itself a share of the quota or to set up local production if the market size warrants it. The government’s goal in establishing quotas on imports is obviously not revenue. The tax may be levied on the quantity-such as 1 0 cents per pound. This establishment of local assembly operations is a form of the phenomenon known as a tariff factory. The tariff on unassembled products or ingredients is usually lower than that on completely finished goods. usually the central bank. Taken to the extreme. a government monopoly of all dealings in foreign exchange. (2) They also built assembly plants in the United States as the long-run solution to. By the same token.

the NTBs have taken on added significance. UNCTAD can have a more direct impact on the firm than WTO. they want to expand in the growth area of world trade: industrial exports. Japan. which could be the critical factor in gaining foreign market access. In the United States. Generally. for example. Elimination of tariffs by itself is not sufficient to help them. appliances. as they requested. exchange-control countries favor the import of capital goods and necessary consumer goods but not luxuries. International firms can playa major role relating to the tariff preferences granted by the industrialized nations. in 1989. they felt that GATT did more to further trade in goods of industrialized nations than it did to promote their own primary products. marks of origin. food and drug laws. and the United States. As traditional trade barriers have declined since World War II. where. WTO. Firms in the EU usually work with trade associations that channel industry views to the EU negotiators. UNCTAD is a permanent organ of the United Nations General Assen1bly and counts over 160 member countries. benefits have not been distributed equally. They include such things as customs documentation requirements. Under GATT trade expanded. administrative protection. These problems are noted for consideration in WHO negotiations. the firm tries to use transfer pricing to get earnings out of the host country or to avoid accumulating earnings there. UNCTAD has made modest progress.2 INTERNATIONAL MARKETING Other Dimensions and Institutions in the World Economy UNCTAD Although GATT-WTO has been an important force in worldtrade expansion. Tanzanian leader Julius Nyerere called it “the labor union of the developing countries. developing countries have also received preferential tariff treatment from the EU. While the definition of “luxuries” varies from country to country. and many left the country. as by other means. The result of these countries’ dissatisfaction was the formation of the United Nations. A complementarity of interest may exist between the less developed countries and international firms in the question of 11. “buy national” policies. If the firm combines its know-how and resources with those of the host country. Invisible Tariff and Other Government Barriers There are other government barriers to international trade that are hard to classify-for example. or no tariff barriers (NTBs). Developing countries have limited experience in exporting manufactured goods. UNCTAD has focused world attention on the trade needs of developing countries and has given them a more coherent voice. creating a growing trade gap between industrial and developing countries. and cosmetics.625. They believe they might achieve this if manufactured goods coming from developing countries faced lower tariffs than the same goods coming from developed countries. can help protect its ‘interest in trade matters through discussions with governments in advance -of trade negotiations. Conference on Trade and Development (UNCTAD). a committee holds hearings at which business representatives can present their international trading problems. it usually includes cars. The firm’s ability to do this depends on the plan’s acceptance by tax officials of the country. through its subsidiaries in various markets. UNCTAD. For example. Overall. It accomplishes this by charging high transfer prices on supplies sold to the subsidiary and low transfer prices on goods sold by that subsidiary to affiliates of the company in other markets. Since these countries have not been able to export commodities in a quantity sufficient to maintain their share of trade. and the Firm WTO’s success in reducing barriers to trade has meant that a firm’s global logistics can be more efficient. Another implication for the firm when foreign exchange is limited is that the government is unlikely to give priority to a company’s profit remittances as a way of using the country’s scarce foreign earnings.in 1964. UNCTAD also worked to establish a tariff preference system favoring the export of manufactured goods from less developed countries. and so on. especially in manufactured goods. The goal of UNCTAD is-to furthers the development of emerging nations-by trade as well 30 © Copy Right: Rai University . Included in the firm’s resources is its global distribution network. Because these barriers are so diverse.exchange to pay them. Brazil also looks to trade associations for industry views. It is true that tariff reductions have been far more important to manufactured goods than to primary products. the firm supplies the foreign marketing know-how lacked by most developingcountry producers. In this situation. Though In any of these countries are members of WTO. their impact cannot be covered in a brief discussion. All charged professed innocence.” Through UNCTAD. Here the multinational firm can be a decisive factor. Further the firm. if Ford had the choice of importing engines from its plant in Britain or its plant in Brazil. about the only option is to produce within the country if the market is large enough for this to be profitable. UNCTAD seeks to improve the prices of primary goods exports through commodity agreements. One achievement is its own formation. the invisible tariff. The less developed countries have been dissatisfied with trade arrangements because their share of world trade has been declining. For international executives in exchange-control countries. If the commodity-producing countries could get together to control supply. UNCTAD’s committees and studies have also made for a more informed dialog. anti-dumping laws. If the exporter does lose its market through exchange control. Also. it could offer competitive exports. labeling laws. a new club for world trade matters that is a lobbying group for developing-country interests. the government issued arrest warrants for 47 executives of multinational companies for abuses in dealing with the government foreign exchange office. and the prices of their raw material exports compare unfavorably with the prices of their manufactured goods imports. this would mean higher prices and higher returns. dealing with the government exchange authorities is a major preoccupation and problem-and never n10re so than in Venezuela. it might choose Brazil if engines from Brazil had a zero tariff and engines from Europe faced a 15 percent duty.

the Bretton Woods system of stable “pegged” rates worked reasonably well. India. automotive. and others with international dealings. Taiwan). Exchange Rate Instability The international payments system is the financial side of international trade. information technologies. government’ has traditionally focused its international economic policy on Europe and Japan. 10 markets are expected to account for 30 percent of total world imports over the next 20 years. or. The stability and certainty of the international gold standard came to an end. the U. The international financial system of the 1930s had no certainty. just as the BISNIS program has been established for Eastern Europe. and energy technologies. the Swiss franc. Another element. Brazil. there existed very large funds in the hands of corporations. this means that there is a dollar rate. As a result. These so-called “Big Emerging Markets-” are Argentina. The increased confidence in the international monetary system contributed to the great surge in international trade since World War II. multinational companies could expand their international markets and participate more actively in the group of the less developed nations. is expected to come from the developing countries. they 11. the government wants to develop a bilateral forum to discuss trade cooperation and to build a U. South Africa. and in unpredictable ways. The Bretton Woods system of pegged exchange rates is dead. In any case.S. In 1944. A special dimension is the fact that transactions occur in many different currencies. which have a majority of the world’s population. Countries that joined the International Monetary Fund (IMF) were required to establish a par value for their currency (in terms of the U. with the advent of World War 1.625. Commercial Center. and transportation infrastructure). These industrial nations will probably continue to be the largest U. give them a windfall gain. The Big Emerging Markets (BEMs) The U. Others called the same activity speculation. government is realigning its export strategy to deal with these opportunities. as well as every other currency.S. nor did it fade away. Cabinet and sub-Cabinet officials are traveling to the BEMs to develop stronger commercial ties. The IMF also continues to provide a forum for international monetary cooperation that lessens the chances of 31 INTERNATIONAL MARKETING International Financial System A major goal of business is to make a profit. In the late 1960s and early 1970s.S. About three-quarters of all world trade growth in the next two decades.S. Thus. Those who were moving funds called the action prudent management because they were protecting their assets. The world wide Depression of the 30s was reinforced by the added risks in international finance. in a world of floating exchange rates. the major industrialized countries have let their currencies “float. International Monetary Fund (lMF) The Bretton Woods international monetary system was an attempt to avoid the uncertainty of the 1930s and to regain some of the stability of exchange rates that existed under the gold standard. The difficulty arises because currencies frequently challenge in value vis-à-vis each other. In any case. Since 1973 the major currencies have been floating. a complication for international pricing and logistics. Mexico. and Turkey. South Korea. For the United States. The holders of funds tended to move them out of currencies they considered weak. A third aspect involving the international monetary system resulted in the establishment of the International Monetary Fund (IMF). banks. They are environmental technologies. This made it increasingly difficult for central banks to defend the par value of their currency. The exchange rate is the domestic price of a foreign currency. It now has a more nebulous role. Central banks had fewer resources than those who were moving funds and had to give up the struggle to maintain the par value of their currencies. the international marketer today must contend with exchange rates that are continually moving targets. must be alert for currency variations in order to optimize their financial performance. however. In the days of the gold standard. This chaotic and uncertain situation contributed to the decline in international trade during that period. Marketing across national boundaries involves financial considerations. exports markets for the next few decades. often in a volatile manner. Even so. In fact. concerned with the need for international capital. however. Instead. there were frequent and arbitrary changes in exchange rates. dollar) and maintain it within plus or minus 1 percent of that value. so firms pay close attention to financial matters. If one country changes the value of its currency. enabling them to continue their international trade-and making them better customers. For every BEM. One element of this system dealt with international trade and left us with WTO.S. and the Brazilian real. led to the formation of the World Bank. and into currencies they considered strong. firms selling to or from that country may find that the altered exchange rate is sufficient to wipe out their profit. for the British pound.” that is. exchange rates did not change in value. stability. the results were the same. Up to 1970. health technologies. Hong Kong.2 © Copy Right: Rai University . International companies must be even more concerned with financial matters than national firms are because they must deal with many currencies and many national financial markets where conditions differ from one to the other. or price. on the other. since 1973. Given the perceived importance of the BEMs. or accepted rules. The government has also identified an initial list of strategic industries for special consideration for U. It still lends money to countries with problems. the IMF did not die. however. exporters. Poland. some of the allied nations met at Bretton Woods to design a better international economic system for the postwar world.S. On the one hand. although numerous devaluations occurred during that period. on the brighter side. Dealing with multiple currencies is not a serious problem in itself. the IMF is a help to international marketing. However. Chinese Economic Area (China.preferences. fluctuate daily according to the forces of supply and demand. the marriage of these interests could help nations achieve their industrialization and balanceof-payments goals. ASEAN. transportation technologies (including space. which we will discuss here.

World Bank activities have improved the international economic environment and aided international business. the IMF played a critical role in solving Mexico’s problems in 1994.625. better markets. that is.2 . created for the purpose of giving “soft” loans to the least developed countries. Many firms find profitable contracts in projects financed by the World Bank. and in the Asian and Russian crises of the late 1990s. The World Bank is parent to the International Development Ass9ciation (IDA). Lending by these two groups supports all aspects of development. the World Bank supplies long term capital to aid economic development. For example. agricultural. INTERNATIONAL MARKETING 32 © Copy Right: Rai University 11. More recently. educational. as occurred in the 1930s. The supply of capital has meant a higher level of economic activity and. tourist.nations taking arbitrary actions against others. It also has an impact on the world economy in which international business operates. and population-control projects. therefore. industrial. including infrastructure. Whereas the IMF is concerned with the provision of short-term liquidity. long-term loans at very low interest rates. many firms are suppliers to projects in developing countries for which the World Bank and IDA lend billions of dollars. World Bank The International Bank for Reconstruction and Development (IBRD or World Bank) is another institution conceived at Bretton Woods. This often opens up new import markets that might have been impossible to enter had the World Bank not given assistance to the country.

and rights across their borders. and in spite of the efforts of trade negotiators to open up 33 The Political Environment Global marketing activities take place within the political environmental of governmental institutions. known as verpackungerordung.” more recently. for example. people. The German packaging law is one example of the impact that political. Companies are developing new packaging that uses less material and includes more recycled content. Historically and important control motive was economic. and expropriation. Despite the costs associated with compliance. In France. or Asia. the less developed a country. when many nations reach advanced stages of economic development. The world’s farmers—be they Japanese. U. the greater the political risk. It has the right. National Controls Create Bariers for Global Marketing Many countries attempt to exercise control over the transfers of goods. and ability to conduct its domestic affairs without 11. Conversely. money. Political risk – the risk of a change in government policy that would adversely impact a company’s ability to operate effectively and profitably—can deter a company from investing abroad. Advanced country laws often define and preserve a nation’s social order.” the goal is to force manufacturers to eliminate nonessential materials that cannot be recycled and adopt other innovative approaches to producing and packaging products. cultural. A sovereign state was considered free and independent. political risk.2 © Copy Right: Rai University . and know how. barriers based on different value systems continue. for example. services. When the perceived level of political risk is lower. Their objective is to encourage economic development by protecting emerging or strategic industries. It regulated trade. and even intellectual activities and social conduct. their governments declare that (in theory. Such policies are known as protectionism or economic nationalism. political parties. the threat of equity dilution. particularly recycling. Differing economic and political goals and different value systems are the primary reasons for protectionism. for example exist because of major differences between the values and objectives of the two countries. outside interference and to use it international power and influence with full discretion. Each of the world’s national governments regulates trade and commerce with other countries and attempts to control the access of outside enterprises to national resources every country has its own unique legal and regulatory system that impacts the operations and activities of the global enterprise. Many governments in developing countries exercise control over their nations’ economic development by passing protectionist laws and regulations. or American – are committed to getting as much protection as possible form their respective governments.900 non. laws forbid the use of foreign words such as i. The political risk of the triad countries. Today. laws may extend to political. and organisations through which a country’s people and rulers exercise power. and regulatory environments can have on marketing activities. money. will create a “ closed loop economy. Many barriers based and different political systems have come down with the end of the cold war. authority. Richard Stanley offered the following concise description. National – States and Sovereignty Sovereignty can be defined as supreme and independent political authority. is quite limited as compared to a country in an earlier stage of development in Africa. These include the governing party’s attitude toward sovereignty. services. Laws and regulations constrain the cross border movement of products. Because of the political influence of the farm lobby in every country.625. supreme court chief Justice fuller said” every sovereign state is bound to respect the independence of every other sovereign state. The goal was to generate revenue by levying tariffs and duties. and the courts in one country will not sit in judgment on the acts of government of another done within its territory. Any company doing business outside its home country should carefully study the government structure in the target country and analyze salient issues arising from the political environment. legal.German companies are currently participating in the program. More than 1. The barriers that exist between the United States and Cuba. a country is more likely to attract investment. managed the flow of people into and out of its boundaries. at least) any practice or policy that restrains free trade is illegal. European. including protection of local industry and fostering the development of local enterprise. policymakers have additional motives for controlling cross border flows. including the global marketer’s ability to address market opportunities. and exercised undivided jurisdiction over all persons and property within its territory. industry appears to be making significant progress toward creating the closed loop economy. people technology. These efforts are hampered by the fact that laws and regulations are frequently ambiguous and continually changing.1 Government actions taken in the name of sovereignty occur in the context of two important criteria a country’s state of development and the political and economic system in place in the country. However.INTERNATIONAL MARKETING LESSON 6: POLITICAL ENVIRONMENT While governing in many countries are studying environmental issues.s. The global marketer must attempt to comply with each set of national—and in some instances. Germany already has a packing ordinance that has shifted the cost burden for waste material disposal onto industry. A century ago. Antitrust laws and regulations are established to promote fair competition. Latin America. The level of political risk is inversely proportional to a country’s stage of economic development all other things being equal.e marketing in official documents. The German government hopes the law. regional —— constraints.

and market protection. and other restrictions affecting return on investment. To provide fair treatment. controls on trade in agricultural products continue to distort economic efficiency. There is no single best solution. foreign companies are taxed by the host nation up to the level imposed in the home country. do business in another. Experience suggests that they are in the best position to know when issues are arising and how to turn potential adversity into opportunity through creative responses. In an absolutist system. Companies should use the law to achieve their own objectives. Most industrialized nations and all democratic nations can be classified as parliamentary. subsidies. Compensation is generally provided to foreign investors. The first is the cost to consumers: when foreign producers are present4ed with barriers rather than free access to a market. Country managers should be encouraged to anticipate government initiative and to propose company strategy for taking advantage of opportunities created by the government policy. the phrase creeping expropriation has been applied to severe limitations on economic activities of foreign forms in certain developing countries. as well as discriminatory laws on patents and trademarks. political pressures frequently cause companies to take in local partners. For example. In underdeveloped countries. look at the range of possibilities. It takes time to implement changes. Un 1977. The second cost is the impact on the competitive ness for domestic companies. the sooner a company identifies possible government directions and initiatives. Companies that take initiatives are prepared to act when the opportunity arises. One of the greatest stimuli to competitiveness is the open market. When a company faces world competition. Intellectual property restrictions have had the practical effect of eliminating or drastically reducing protection of pharmaceutical products. Short of outright expropriation or nationalization. At the other end of the spectrum are absolutist governments. called earning stripping. 4. Many companies make efforts to minimize their tax liability by shifting the location of income. Nationalization occurs if ownership of the property for by international standard. Generally. and adequate” manner provided for by international standard. absolutist countries are newly formed nations o—nose undergoing some 34 © Copy Right: Rai University 11. The foremost goal of national governance is to protect the right of national sovereignty. it is possible to take Types of Government: Political Systems A knowledge of the form governments’ can take can be useful in appraising the political climate. Expropriation The ultimate threat a government can pose toward a company is expropriation.625. The United States has dozens of such agreements in place. which include monarchies and dictatorships. Such controls work against the driving forces of economic integration. Companies that are procreated and sustain world class competitive advantage. Local mangers often have the best understanding of the political environment. advantage of government concessions. an approach that does not increase the total tax burden to the company. many governments have negotiated bilateral tax treaties to provide tax credits for taxes paid abroad. Other issues are increased local content requirements.2 . Frequently. This type of diverse geographical activity requires special attention to tax laws. the ruling regime dictates government policy without considering citizens’ needs or opinion. and each company should look at itself and tat the country situation to decide on strategy. Listen to country managers. it must figure out how to serve a cliché market better than any company in the world. In one approach. the organisation for economic cooperation and Development (OECD) passed the model Double taxation convention of income and capital to help guide countries in bilateral negotiations. or it must figure out how to compete in face to face competition. Anticipate government policy changes.agricultural markets. foreign companies reduce earnings by making loans to us.S subsidiary can deduct the interest it pays on such loans. There by reducing it tax burden. The price of protection can be very high for two basic reasons. the sooner it will be in a position to propose its own plan to help the country achieve its objectives.income countries. One way to classify governments is to consider them as either parliamentary (open) or absolutist (-closed). effective. Expropriation refers to governmental action to dispossess a company or investor. Create a win-win situation. arrangements. quotas for hiring local nationals. Dilution of Equity Control Political pressure for national control of foreign owned companies is a part of the environment of global business in lower. price controls. The U. Nationalization occurs if ownership of the property or assets in question is referred to as confiscation. First. 2. 1. Global companies have also suffered discriminatory tariffs and no tariff barriers that limit market entry of certain industrial and consumer goods. the result is higher prices for domestic consumers and a reduction in their standard of living. The experiences of many companies demonstrate that by satisfying government demands. Parliamentary governments consult with citizens from time to time for the purpose of learning about opinions and preferences. Government policies are thus intended to reflect the desire of the majority segment of the society. and maintain its corporate headquarters in a third. Affiliates rather than using direct investment to finance US activities. especially in all aspects of domestic business activity. although not often in the “ prompt. it has been estimated that tax avoidance by foreign companies doing business in the United States costs the US government several billion dollars each year in lost revenue. These have included limitations on repatriation of profits. There are no universal international laws governing the levy of taxes on companies that do business across national boundaries. 3. INTERNATIONAL MARKETING Taxes It is not uncommon for accompany to be incorporated in one place. Host nation governments sometimes attempt to control ownership of foreign owned companies operating within their borders.

The two parties generally have different philosophies. Mexico’s main opposition party. however. the Republican party is often viewed as representing business interests. although other parties are allowed. the government is disbanded and a new election is called. nationalization.vast majority. none of which is strong enough to gain control of the government. especially when it can provide the stability and continuity necessary for rapid growth. where such problems have largely been resolved. single-party. INTERNATIONAL MARKETING Political Risks There are a number of political risks with which marketers must contend. Usually.g. and oligarchies may be able to provide great stability for a country. their elected representatives ran smart of a majority. and Libya are good examples of dominated one-party systems. the’ government is classified as parliamentary.opportunity for others to elect representatives to govern the country. Such actions are more likely to be levied against foreign investments. for example. Because the ruling party holds support from the . to maintain its power. It may be just as tempting to conclude that a democratic political system is a prerequisite for political stability. India. and internal dissension. Countries such as the Philippines under Marcos and Nicoragua under somoza held elections. there are typically two strong parties that take turns controlling the government. the system is not necessarily a poor one. The United Kingdom is a good example of a constitutional hereditary monarchy. language. Countries operating with this system include Germany. is that such systems frequently exist in a divided society where dissident groups are waiting for an opportunity to challenge the regime. is prepared to use force or any necessary means to eliminate the introduction and growth of other parties. and more nationalization occurred in 1982 under the French Socialists. The democratic system is strongly established in India. despite being a developing economy. but economic problems caused dissatisfaction with the PRI in the 1980s. In the 1991 elections in Poland. possesses a solid political infrastructure and political institutions that have with stood many crises over time. Cuba. This classification results in four types of governments: two-party. ethnic. ideological. It may be tempting to believe that stability is a function of economic development in the sense that a more developed nation should also have more political stability. In the United States. Italy is another politically unstable developed country. expropriation. resulting in a change in government policy when one party succeeds the other. and economic problems.e. The former Soviet Union.. Yet India’s political stability is hampered by regional. recurring labor unrest. The party.. the risk of widespread disruption and revolution can be quite high. South Africa. In a single-party system. there are several political parties. elections. has been beset with internal and external problems. Hazards based on a host government’s actions include confiscation. In a dominated one-party system. Some monarchies and dictatorships (e. For example. does not have the support of the majority of the representatives). If the government does not survive a vote of no confidence (i. religious. In a multiparty system. These geographic. This form of government is often used by countries in the early stages of the development of a true parliamentary system. it can be argued that Vietnam. The former Soviet Union had elections and mandatory voting but was not classified as parliamentary because the ruling party never allowed an alternative on the ballot. In contrast. though local firms’ properties are not totally immune. This stability is due in part to Vietnam’s relatively closed society. and dominated one-party. despite the monarch. Egypt has operated under single-party rule for more than three decades. France. but the results were suspect because of government involvement in voting fraud. India’s difficulties remain. is politically more stable than Italy. there may be several parties. any instability that may occur can be kept under control. A change in a few votes may be sufficient to bring the coalition government down. Absolute monarchies are now relatively rare. the coalition is continuously challenged by various opposing parties. The National Action Party (PAN). resulting in no alternative for the people. Its political atmosphere is marred by a weak economy. But when serious economic problems persist. high exists in many communist countries and Arab nations. and creeping expropriation. began gaining strength. In a two-party system. whereas the Democratic party is often viewed as representing labor interests. and no party got more than 13 percent of the vote. and Israel. a developed nation. 11. For example the Soviet Union had repeatedly shown a willingness to quell any opposition within its satellite countries. each of which wants to protect its own interests. especially one with a relatively closed society. monarchies. In contrast. but one party is so dominant that there is little. The longevity of the coalition depends largely on the cooperation of party partners.2 © Copy Right: Rai University 35 . and ethnic problems inhibit the government’s ability to respond to one sector’s demands without alienating others. Dictatorial systems. When a ruler suddenly dies.625. A government must then be formed through coalitions between the various parties. Many countries’ political systems do not fall neatly into one of these two categories. citizens” dissatisfaction~ and frustration may create an explosive situation. Even though some parties may be large. The problem. twenty-nine parties (including the Polish Beer Lovers’ Party) won seats. as well as the poor and disaffected. the largest democracy in the world. a single-party system does a How some opposition party. If a country’s ruler and military are strong.kind of political transition. One should not be hasty in making generalizations about the ideal form of government in terms of political stability. Charles de Gaulle. and it is most inconceivable that the Indians would choose any other system. Unlike such other democratic nations as Australia. Saudi Arabia and North Korea) have parliamentary. possibly foreshadowing a transition away from a single-party system. domestication. The United States and the United Kingdom are prime examples. nationalized France’s three largest banks in 1945. multiparty. Another way to classify governments is by number of political parties. Mexico has been ruled since its revolution by the Institutional Revolutionary Party (PRI). the dominant party does not allow any opposition. Such a system may easily transform itself into a dictatorship.

racial. A more recent example involves Occidental Petroleum. which wanted the United States to review Venezuela’s GSP eligibility after the country confiscated the firm’s assets without compensation. and transfer risk. marketing. Closure is essential if the group is in some sense to act as one. Barclays Bank made similar moves. Because countries can change the rules in the middle of the game. control.g. four sets of political risks can be identified: general instability risk.2 . Lebanon has experienced conflict among the Christians. 3. a company should identify and. Nationalization involves government ownership. Confiscation is the process of a government’s taking ownership of a property without compensation. Muslims. The result is that private entities are/allowed to operate the confiscated or expropriated property. Pepsi sold its South African bottling operation to local investors.. Human nature involves monastery (the urge to stand alone) as well as systems (the urge to stand together). when Mexico attempted to control its debt problem. Libya’s Colonel Gadhafi’s vision of Islamic socialism led him to nationalize all private business in 1981. The Iranian revolution that overthrew the Shah is an example of this kind of risk. The breakup of the Soviet Union should not come as a surprise. for example.g. After property has been confiscated or expropriated. foreign companies relinquish control and ownership. and finance. As a result. The Overseas Private Investment Corporation (OPIC) defines creeping expropriation as “a set of actions whose cumulative effect is to deprive investors of their fundamental rights in the investment. Various defensive and protective measures will be discussed later. and other religious groups. after finding out that the state was not sufficiently proficient to run the banking business. Potential sources of political complication include social unrest. Expropriation differs somewhat from confiscation in that there is some compensation. Burma’s foreign trade. internal dissension and insurgency. For the sake of its own survival. President Jose Lopez Portillo nationalized the country’s banking system. transfer risk applies to any future acts by a host government that . is completely nationalized. companies must adopt adequate safeguards. Shortly thereafter. General instability risk is related to the uncertainty absolute future viability of a host country’s political system. this action affects a whole industry rather than just a single company. or profit out of the host country back to the parent firm Although the threat of direct confiscation or expropriation has become remote. evaluate the relevant indicators of political difficulty. Attitudes of Nationals An assessment of the political climate is not complete without an investigation of the attitudes of the citizens and government of the host country.625. Generally. Unlike Communists in Hungary and Poland. and confiscation. Finally. rebuilding private markets in Czechoslovakia will be both slow and difficult. The Hindu-Muslim conflict in India continues unabated. developed a plan to sell thirty-six French banks. although wanting to modernize its economy. When situations worsened in South Africa and political pressures mounted at home. currency inconvertibility or cancellation of import license) can be easily enacted. Usually. ownership/ control risk. Operation risk proceeds from the uncertainty that a host government might constrain the investor’s business operations in all areas. A company may not be directly involved in local disputes. “a cooperative society tends to be a closed society. which is likely to encourage dissension among the various groups. the causes of this action are either poor economic performance or social pressures. ownership/control risk is related to the possibility that a host government might take actions (e. 2. and it is the government that operates the business being taken over. including production. In contrast. The French government. religious. but they now have to pay attention to so-called creeping expropriation. a company whose property is being expropriated agrees to sell its operations-not by choice but rather because of some explicit or implied coercion. General Motors followed suit by selling its operations to local South African management in 1986. and cultural differences.” Laws that affect corporate ownership. Monastery encourages competition. For example. In the case of domestication.1. and Coca-Cola signaled that it would give control to a local company. but its business can still be severely disrupted by such conflicts. and ideological. either completely or partially. Social Unrest Social disorder is caused by such underlying conditions as economic hardship. 36 © Copy Right: Rai University 11.might constrain the ability of a subsidiary transfer payments. a cooperative society may have to obstruct the dissemination of new ideas and neutralize an external group that poses a threat. expropriation) to restrict an investor’s ownership and control of a subsidiary in that host country. but systems emphasizes cooperation. revolutions. The nationals’ attitude toward foreign enterprises and citizens can be quite inhospitable. More often than not.” Not surprisingly China. the attitudes of nationals. ii can be either nationalized or domesticated. operation risk. capital. and of threat has appeared. 4. though not necessarily just compensation. MNCs have generally been concerned with coups. In another case of nationalization. and reinvestment (e. As explained by Alderson. Another classification system of political risks is the one used by Root IS Based on this classification. does not fully embrace an open economy. Domestication may sometimes be a voluntary act that takes place in the absence of confiscation or nationalization. profit. and the policies of the host government. INTERNATIONAL MARKETING Indicators of Political Instability To assess a potential marketing environment. Czech Communists nationalized 100 percent of their economy. to the nationals. China apparent has learned a lesson from the Soviet Union’s experience. An example of confiscation is the Chinese government’s seizure of American property after the Chinese Communists took power in 1949. and the two concepts provide alternative ways of utilizing resources to meet a society’s needs.

the hiring of local workers should go beyond the filling of labor positions.2 © Copy Right: Rai University 37 . Thus. and there were no domestic capitalists who could buy these enterprises. Sometimes local sourcing is compulsory.and large-scale en-terprises. Further investment in local production facilities by the company will please the government that much more. transfer of state property to municipalities. Governments may require products to contain locally manufactured components because local content improves the economy in two ways: (1) it stimulates demand for domestic components. Being Civic Minded MNCs whose home country is the United States often encounter the “ugly American” label abroad. The threat forced Cathay Pacific to sell a new public issue to allow Chinese investors to have minority interests in the company. it should also be a good corporate citizen there. and these concerns are often linked to concerns over foreign governments’ actions that may be seen as improper. Corporations rarely undertake civic projects out of total generosity. there are several measures that MNCs can implement in order to discourage a host country from taking control of MNC assets. that local people are lazy. some military tank manufacturers tried to secure tank contracts from the Netherlands by agreeing to subcontract part of the work on the new tanks to Dutch companies. To simply auction assets might result in foreigners’ cheap acquisitions while failing to cultivate a “culture of capitalism” among citizens. especially with local companies. Government policy formulation can affect business operations either internally or externally. foreigners make the simple but costly mistake of assuming that citizens of LDCs are poor by choice. They took care of the absence of domestic savings by giving away shares to citizens. small-scale privatization through public auctions. Sec-ond. A modification of this strategy would be to use subcontractors. To shed the undesirable perception. a government’s attitude toward foreigners is often relatively short-lived. It is highly desirable to provide basic assistance because many civic entities exist in areas with slight or nonexistent INTERNATIONAL MARKETING Measures to Minimize Political Risk Political risk. One method is to convert from a private company to a public one or from a foreign company to a local one. it can develop local allies who can provide valuable political contacts. a company should try to share ownership with others. for example.625.and large-scale enterprises. and this image should be avoided. The mood can change either with time or change in leadership. Such attitudes may arise out of local socialist or nationalist philosophies. Government officials solved the valuation problem by using a system of sequential auc-tions which generate information about enterprises market values. A local economy can be stimulate in a number of different ways. The pri-vate sector was responsible for less than one percent of production. albeit controversial. It serves no. transformation of cooperatives. The move was made to convince Hong Kong and china that the company had Chinese roots. joint ventures and mass privatization to privatize medium. Employment of Nationals Frequently. If you were a policy-maker. can at the very least be minimized. Policies of the Host Government Unlike citizens’ inherent hostility. especially in the short run. but such projects make economic sense in the long run. the only foreign company allowed to sell switchboards in France because the firm’s PBXs are made there. solution: mass privatization. and (2) it saves the necessity of a foreign exchange transaction. unintelligent. multinationals should combine investment projects with civic projects. charged that Cathay Pacific Airways’ Hong Kong landing rights should be curtailed because Cathay Pacific was more British than Chinese. Brazil expelled Mellon Bank be cause of the bank’s refusal to cooperate in renegotiating the country’s massive foreign debt. All citizens over the age of eighteen received “coupons” which could be used to bid for shares in enterprises. For the vast majority of medium.000 medium. For example. The effect is external when the policy regulates the firm’s activities in another county. the Czech and Slovak Re-publics faced a policy dilemma. 11. which may be in conflict with the policy of the company’s home country government. or uneducated. public tenders. IBM is. Third. useful purpose for a company to assume. The impact of a change in mood can be quite dramatic. the conventional methods were not feasible be-cause they would have resulted in long delays while benefiting only foreigners or a few rich nationals. Dragon’ Airline. One strategy may involve the company’s porches local products and raw material for its production and operations. is to hire only locals as managers Sharing Ownership Instead of keeping complete ownership for itself. Stimulation of the Local Economy One defensive investment strategy calls for a company to link its business activities with the host country’s national economic interests. the former Czechoslovakia was one of the most extreme cases of a centrally planned economy because the state controlled 98 percent of property. By assisting local firms. These methods were used when they would result in a rapid transfer of ownership. There were numerous problems. this formerly communist country had low household savings rates.Nationals are often concerned with foreigners’ intentions in regard to exploitation and colonialism. The effect is internal when the policy regulates the firm’s operations within the home country.and large-scale firms. and us-ing direct sales. what would you do? Conventional privatization methods include: restitution to original owners. Marketing Strategy 4-1 A Primer on Privatization After the 1989 Velvet Revolution which began the tran-sition to democratic rule. It is not sufficient that the company simply does business in a foreign country. Such an attitude may become a self-fulfilling prophecy. though impossible to eliminate. The Republics thus came up with a very innovative. First. but they did not know what these enterprises might be worth. claiming that it is a real Chinese company. they had to quickly privatize over some 7. and it can change for either the better or the worse. United Brand’s policy. unmotivated.

Their concern was understandable. Pizza Hut came to China’s rescue by claiming that most domestic and other foreign suppliers could not meet its specifications. Amdahl (46 percent owned by Fujitsu). many U. the petition of the U. voiced their objection to. or they may let their government do it on their behalf. and it has 67 percent of the world market. Importers must let their government know why imports are critical to them and their consumers. and water systems because such projects benefit the host country as well as company. negotiating skills. As events developed. and it is wise to lobby quietly behind the scenes in order not to cause unnecessary political clamor. There is not much to be grainy a company being ethnocentric and trying to westernize the host country’s citizen Multinational firms. mushroom industry asked for a quota against imports from China. matters related to Central American revolutions and Cuban troops in foreign countries. Another tactic could involve -trying to adopt a local personality.625.I. what these companies did was local. behavior after/during kidnapping.5 million contract. but they also may. took measures to reduce their exposure in France in response to a fear that a Socialist: Communist coalition might gain control of the legislature in the elections of 1978. when measures are necessary to reduce exposure. Nevertheless.A. and the sale of equity holdings at foreigners and French nationals living abroad. Subsequently. Companies may not only have to lop by in their own country. INTERNATIONAL MARKETING Big Brother Supercomputers are the fastest computers which are used mainly by scientists. Observation of Political Mood and Reduction of Exposure Marketers should be sensitive to changes in political mood. the level of U. Among those submitting proposals were Cray Research. in the 1980s Texas Instruments removed identifying logos and signs in EI Salvador. in a time of uncertainty and under such circumstances. A contingency plan should he in readiness. For example. a government action designed to protect the prices of U. Other Measures There are a few other steps that MNCs can undertake to minimize political risk. to open a factory in southern China. the direction the influence does not have to flow in one direction only. A practical approach may require that the company blend in with the environment. Cray Research Inc.S. When the U. its parent.S. exports to the home country and foreign direct investment in the United States from the home country. the new government was pragmatic and did not actively pursue expropriation in a broad sense. roads. weapon handling. due to their presence in a large number of countries. as when buying from the United States or China. A good idea is to assist in building schools. and protection of assets. A survey of U. U. Brazilian arms are thus attractive to the Third World because those arms are free of ideological ties. Pizza Hut has a great deal at stake because it is one of China’s largest customers as well as a user of half of some nine million pounds of mushrooms for pizzas-not to mention the desires of Pepsi Co. especially in terms of the valuable goodwill generated in the long run. Political Neutrality For the best long-term interests of the company.In 1987. Prudence enquired that these transactions be kept quiet so as to avoid reprisals. A company should clearly but discretely state that it is not in the political business and that its primary concerns are economic in nature. holds 20 percent.S.S. it is not wise to become involved in political disputes among local groups or between countries. Fujitsu Ltd. computer makers. must be mindful of terrorist threats. self-defense. likewise.municipal infrastructures that would normally provide these facilities. E. and Honeywell-NEC (SO percent-owned b} Nippon Electric 11. the transfer of patents and other assets to foreign subsidiaries. Companies as well as special interest groups have varying interest. political risks can be reasonably managed. Although the coalition did win. Behind-the-Scenes Lobby Much like the variables affecting business. and each party will want to make its own opinion. clothing retailers complained vigorously when trade barriers were erected against the importation of clothes. imports from the home country of the MNC is the most important variable. When the political climate turns hostile. IBM. Even though a firm’s operation is affected by the political environment. the Massachusetts Institute of Technology (M.S. has 6 percent. mushroom industry was dented.-made semiconductors because those firms would have to absorb any price increase. kidnapping avoidance. a purchasing country does not feel obligated to become politically aligned with a seller. A supercomputer can cost upward of $30 million. One strategy could involve keeping a low profile because it is difficult to please all the people all the time. have to lobby in the host country. Some major banks arid MNCs. it may be desirable for company to be relatively inconspicuous.2 38 © Copy Right: Rai University .) planned to buy or rent a supercomputer and solicited bids former $7. Their defensive strategy occluded the outflow of capital. as it outranks U.S. In explaining the intensity of foreign corporate representation in Washington. collecting information from local sources on terrorists. Lobbying activities can be undertaken. Most of the MNCs with antiterrorist programs focus on security equipment rather than on training executives and their families.T.T. In such a case. Such activities once concluded made it difficult for the Socialist government to nationalize the companies’ properties. System. hospitals. For example. the fears were partially realized.known. The third-place NEC Corp. as-most of these companies were on the left’s nationalization list.S. Their government can be requested to apply pressure against foreign government. Companies may want to do the lobbying themselves.-based MNCs found that less than 50 percent had formal programs to deal with a terrorist attack. in second place. Some of the activities included in antiterrorist training are: defensive driving.. Brazilian fins employ this strategy and keep a low profile in. is the undisputed leader in this market segment.S.

S.’s president that “imported products may be subject to U. -my tea. My own initial experience with Third World forms of bribery may serve as an example. Cray Research has been unable to further penetrate the public sector. for Chai. Is it appropriate for the U.S. I.T. These particular suggestions were delivered in.625.T.’s preference for Japanese-made machines. if sensed by foreign colleagues. tones of respect. If you were in a similar situation. as we are now friends. Congressional critics did not like the idea of a Japanese giveaway. Somehow. I terminated more than a commercial venture. government’s intervention by canceling its procurement and announcing that it planned to apply for federal funds for a research center. and.” Then. Is it appropriate for the United States to try to close off its supercomputer market to Japan while. the biggest supercomputer users in the world. they are detested in our culture.-made supercomputers. React properly in canceling its procurement plan? 3. like most Americas. The public sector includes government funded universities and research labs.S. argued that the requirement in question was bogus since it was included solely to favor NEC’s machine. 2. one of the least commercially productive.s. I didn’t do it and didn’t expect it of others. my gift.I. And. Cray has quietly but effectively lobbied to block the move.S.T.S. despite a denial of the Commerce Department of the government’s threat.). it added Insult to my injury. when Cray donated in the same year an X-MP system to the Energy Department in support of a national high-school supercomputer program. the National Institute for Fusion Research chose to lease NEC’s SX-3 system for $625. of how to cope with foreign payoffs. for example. I simply kept smiling. Outwardly. Fujitsu was prevented from donating a $17 million supercomputer to a Colorado consortium of environmental scientists. Although Japanese firms have long been Cray’s customers. in light of Japan’s barriers preventing U.S. however. although negotiations were complete. The Japanese government (Japan’s ‘biggest buyer) has never bought from Cray. government intervened. They did not object. Beyond that. Still Japanese officials insisted that the extra power available from Cray’s machine was irrelevant since the fusion scientists did not need it. It was. government has done its best to discourage sales of Japanese supercomputers in the United State.T reacted to the U. according to four pages of benchmark test results.S. to bring to my home when you visit. as well as an interpersonal relationship that could have’ anchored my commercial prospects in that region for years to come.I. BRIBERY A Matter of National Perspective JEFFREY A. This conviction. it was made clear to M. Inside. For in deciding to conduct international business by American rules. while accusing Japan of being unfair.I. They came almost as an. U. due to political pressure.I. however. However. an eight band-radio. Whenever an American university or government agency ha5 expressed an interest in buying a Japanese unit. Although payoffs obviously exist in the United States. this type of solicitation may suggest to even the most overseas-oriented executives that U. Do you agree with the author’s rejection of the request for “gifts”? 2.S.”Both Chai (tea) and Zawadi (gift) can be Swahili terms for bribe. I had looked forward to buying my counterpart a final drink to symbolically complete the deal in” American fashion.Corp. I was being asked for a bribe.As an example of how difficult it is to penetrate Japan’s public sector. Questions 1.000 a month. The U. government to pressure M.In 1991. a request my own culture would condemn. especially when requests for “gifts” take on a form that most Americans consider bribes. I walked away. have not yet bought a Japanese machine. to reject Japanese supercomputers in spite of lower prices? Note that the M. he expected money. FADIMAN INTERNATIONAL MARKETING San Jose State University U.That walk was not the longest in my life.2 © Copy Right: Rai University 39 . on the other hand. “I don’t pay bribes.M.that would use ‘several U.The amount he suggested seemed huge at the time.like [a sum of currency was specified] as Zawadi. government labs.T.Washington. Did MI.S. the U.Learning of M. In this instance. trying to pressure the Japanese government to purchase American supercomputers? Questions 1. I am American. executives may feel unsure. Cray’s C90 system surpassed all but one of the Fusion Institute’s speed requirements. Beyond it lay the opportunity to do business in a wholly local fashion. business values are morally superior to those used abroad. at the same time. but it was his specific request for a radio that angered me. can shatter the most carefully planned-commercial venture. my stomach boiled. Bwana I would . It occurred in East Africa during the I 970s and began with this request “Oh. it would not be in the interest of the United States to purchase Japanese units. I expect all monetary discussion to precede the signing of contracts. However. The acting Secretary of Commerce formally informed M. afterthought at the conclusion of negotiations in which details of a projected business venture had been sided one by one by one. supercomputer firms from entering the Japanese market. antidumping duty proceedings informally.” I declared. research projects that would use the supercomputers were federally funded. I also closed a gate that opened into a foreign culture. and its market share-in this sector remains at 8per cent. Instead. Cray. I had been asked to pay once more Once? How often? What were the rules? Where would it stop? My reaction took only moments to formulate. how would you handle the situation while considering-your own business needs? 11.I. Furthermore. that.T. In consequence.The 1990 supercomputer trade accord has helped Cray Research to increase its market share in commercial installation is in Japan to 25 percent.T. they pointed out that the bid required the machine to work with specialized storage devices. has done exactly the same thing. after every commercial aspect had been settled.

administrative law originates in regulatory bodies and local communities. A common law system is a legal system that relies heavily on precedents and conventions. It would even seem immoral. a growing body of law rejected the idea that only states can be subject to international law. They rarely exchanged visits and had few other social contacts. Countries with such a system include the United States. economically speaking. Canada. the majority of countries have legal systems based on civil code traditions. Code law uses codified. . in turn. they moved out. commercial law has its own administrative structure. As trade grew among nations. these countries’ laws are tradition-oriented. As the name implies. obtained a research grant to study a village in Denmark. As noted. of laws are common to all nations. Common law. including their neighbors. establishing peace. the concept of arm strength relationships would seem strange and alien. they visited their parents only occasionally. one should treat relatives and friends in the same way Common Versus Code Law Private international law is the body of law that applies to interpretations of and disputes arising from commercial transactions between companies of different nations. codes. or state level. Professor Reddy was amazed to observe that the villagers hardly knew one another. The idea that. the status of neutral nations. are established by a formal registration of the property in commercial courts. were doing and apparently little interest in finding out. which is evolving. When the children reached adulthood. India. and other British colonies. Everyone would be interested and involved in the business of the others. Property rights. Despite the differences in systems. for example. intellectual property rights must be registered. and agreements. They had little information on what other villagers. According to Professor Reddy. commercial law was not recognized as a special entity. the main rules of the law are embodied in legislative codes. for the role of corruption. Great Britain. whereas in common law counties. and case law is the product of the court system. an Indian social anthropologist who. There are some twenty-five common law or British law countries. a entities. Statutory law is codified at the national. although in a boarder sense than dealing with problems arising from war. covenants. order in commercial affairs assumed increasing importance. International law pertains to trade and other areas that have traditionally been under the jurisdiction of individual nations. In the latter. common or civil law : directly affects the form a legal business entity will take. and international commercial law. Corruption: In the Eye of the Beholder? On January 25. Under civil or code law. reversing the common pattern of Western scholars going to study developing countries’ social behavior. companies are formed by contract between two or more parties who are fully liable for the actions of the company. The host country’s legal system : that is. Every circumstance is clearly spelled out to indicate what is legal and what is not. also known as code or civil law. Family contacts would be very frequent and the members of the extended families would support one another in many ways: Relations with neighbors would also be close.625. He spent a few months in this village and registered his impressions of the relations among its inhabitants. Countries employing a statute law system. Today. even relationships between parents and children were not very close. and other political issues such as diplomatic recognition of new national entities and governments. The creation of laws governing commerce developed on a state by state basis. or the law of nations. In the latter.2 . daily house visits would be common. for example. public law. is established by tradition and precedents. it is useful to distinguish between the two major legal systems: common law and statute law. commercial. laws governing commerce emerged gradually. written norms. which are rulings from previous cases. 1992. and hybrid systems are merging. and criminal law. International law still has the function of upholding order. federal. Arm’s-length relationships in economic exchanges would be much more likely to prevail in the Danish village than in the Indian village. Most countries over seventy are guided by a statute law legal system. evolving into what is termed the law of the merchant.This story has implications for the concept of arm’s-length and. Whereas the law had originally dealt only with nations as entities. Elaborate international rules gradually emerged covering. Early international law was concerned with waging war. three distinct forms 40 © Copy Right: Rai University 11.Professor Reddy contrasted this behavior with that prevailing in a typical Indian village of comparable size. and after that. the Economist reviewed a paper by Prakash Reddy. Thus. some : such as trade marks but not patents : are established by prior use. There are to categories of international law.INTERNATIONAL MARKETING LESSON 7: LEGAL ENVIRONMENT Legal Systems To understand and appreciate the varying legal philosophies among countries. although an increasing number of countries are blending concepts. International law may be defined as the rules and principles that nation-states consider binding upon themselves. on the other hand. the judicial system is divided into civil. In common law countries. There is also a strict and literal interpretation of the law under this system. include most continental European countries and Japan. At first international law as essentially an amalgam of treaties. until recently. which are complemented by court decisions. In code law counties. Judges’ decisions are guided not so much by statutes as by previous court decisions and interpretations of what certain laws are or should be. As a result.

proactive marketer can do a great deal to prevent conflicts from arising in the first place. the attempt to create an impersonal bureaucracy that would operate according to principles in which there is no place for personalize. Vallianatos. licensing and trade secrets. and the nation whose laws apply should be specified in a jurisdictional clause. Normally. An MAI that is worth doing should deal with how investments will affect sustainable development. In some countries. The Anglo-Saxon concept of privacy is probably just a manifestation of arm’s length relationships.” MAI supporters also point out that the agreement If(allows countries to adopt any measure deemed appropriate Sidestepping Legal Problems : Important Business Issues Clearly. and economic activities in the EU will provide additional substance to international law. As Mark A. this behavior might require bending. patents and trademarks.The Indian and Danish villages represent polar or extreme cases of how individuals may interact within a community. In western Europe. 11. In the lndian village. citizens of one country must be assured that they will be treated fairly in another country. senior director at the Chemical Manufacturers Association. Therefore. occasionally. It may allow them to do everything based on profit motives with-out environmental considerations providing sensible limits on how they operate. Whether Professor Reddy’s description of them is accurate or not. and how they will affect excessive resource extraction-those kinds of issues. the very features that make a country a less cold and indifferent-place are the same ones that increase the difficulty of enforcing arm’s-length rules that a-re so essential for modern. Most societies probably fall somewhere between these two extremes. The services of counsel are essential for addressing these and other legal issues. especially concerning issues such as establishment. Garrity Baker. In this society. MAI gives new rights to corporations without addressing their responsibilities to workers and the environment. would conflict -with the accepted social norm that family and friends come first. a large number of consumer and environmentalist action groups have joined in opposition to the agreement. etc. . efficient markets and governments. However. or the The Multilateral Agreement on Investment In 1995. The court may examine whether the foreign company maintains an office. an international policy analyst at Friends of the Earth. the government employee. There are several alternatives from which to choose: the laws of the domicile or principal place of business’s of one of the parties. The person who refused to provide this help would be seen as breaking the prevailing moral code and would be ostracized. and bribery. the place where the contract was entered. business.. so-called per-formance requirements favor local investors over for-eigners. explained: Our fear is that MAI will give multinational corporations the opportunity to treat the whole world as their raw pool of natural resources and labor and consumer markets. Some industry experts downplay MAI’s potential to contribute to environmental degradation. “When foreign companies that have better It environmental performance come in and invest in a market bring that know-how with them. for example. would be expected to help relatives and friends with special treatment or favors even if. it would be far easier for the Danish bureaucrats to approximate in their behavior the Weber Ian ideal than for the Indian bureaucrats. For example. antitrust. with each having a bureaucracy charged with carrying out its functions through the instruments described earlier. Relatives-and friends would simply expect preferential treatment whether.2 © Copy Right: Rai University 41 . or even breaking. with Northern . all economic activity within a nation is governed by that nation’s laws. The importance of international law firms is growing as national firms realize that to properly serve their clients. jurisdiction.If a government were established in each of the two villages. The formulation of the governance rules for trade. the creation of the single market now assures that citizens from member nations get fair treatment with regard to business and economic activities carried out within the Common Market. which country’s laws apply to the export contract? Which apply to the letter of credit opened to finance the export transaction? The parties involved must reach agreement on such issues. Sadly. Many developing countries would probably be clos9r to the model represented by the Indian village. the astute.would appear bizarre. Employees of foreign companies working in the United States must understand that courts have jurisdiction to the extent that the company can be demonstrated to be “doing business” in the state in which the court sits. maintains bank accounts or other property. Foreign companies set an example that others can learn from. the GECD began talks on a new initiative known as the Multilateral Agreement on Investment (MAI) that will set rules for foreign investment and provide a forum for dispute settlement. R. how they will affect workers’ rights.as strangers . which nation’s laws apply? If the national laws of country Q pertaining to a simple export transaction differ from those of country P. the best course to follow is to get legal help. cronyism.625. they must have a presence in overseas jurisdictions. When transaction crosses boundaries. solicits business. In fact. INTERNATIONAL MARKETING Jurisdiction Company personnel working abroad should understand the extent to which they are subject to the jurisdiction of hostcountry courts. or has agents or other employees in the state in question. administrative rules and departing from universal principles.individuals in the private or public sector. Establishment Under what conditions can trade be established? To transact business. European and Anglo-Saxon countries closer to the Danish-village-model. foreign companies may be required to obtain some goods and services from local companies rather than the home office Performance requirements can also take the form of stipulations that a certain number of senior managers must be local nationals or that the foreign company must export a set percentage of its production: The existence of the MAI negotiations remained largely unknown to the general public until a Canadian consumer rights group obtained the text of MAI and posted it on the Internet. they provide convenient polar cases. then over time ‘“ that know-how kind of trickles down to other companies.they were dealing with. says. the global legal environment is very dynamic and complex. just like any other individual. and many other countries closer to the Indian village model.

” with each party’s criteria stacked on different sides of the scale.e. The term trade secret refers to know-how (e.2 . copy right. If a dispute arises under such a contract. The terms patent. The U. inventions and creative works).” Section 42 of the U. Counterfeiting is the unauthorized copying and production of a product. as well as such mundane products as Farm oil Filters and caterpillar tractor parts. manufacturing methods. At the other end of the spectrum are industrial products. Although faces are more likely to be premium priced consumer products. Products affected by counterfeiting cover a wide range. Dior and Pierre Cardin fashion apparel. Counterfeiting Counterfeiting is the practice of unauthorized and illegal copying of a product.. A patent protects an invention of a scientific or technical nature. This know how generally unknown in the industry.600 respectively. If the parties fail to specify which nation’s laws apply. Samsomite luggage. offers protection against unauthorized copying by others to an author or artist for his or her literary. videotapes. medical vaccines. Even Coke is not always the “real thing” as it very easy for counterfeiters in LDCs to put something else that looks and tastes like Coke into genuine Coke bottles. and helicopter parts.. Infringement occurs when there is commercial use (i. copying or imitating) without owner’s consent. Counterfeiting is a serious business problem. trademarks. in winning two trademark infringement cases in china. by disagreements between key Washington agencies that might be affected by the agreement’s provi-sions. a number of governors felt that MAI would impinge on state sovereignty. and artistic works. Companies sometimes find ways to exploit loopholes or other unique opportunities offered by patent and trademark laws in individual nations. Trademark and copyright infringement is a critical problem in global marketing and one that can take a variety of forms. A copyright. State Department and Commerce Department are generally supportive. More over. low init value predicts have not escaped the attention of the counterfeiter. Levi’s jeans and Cartier watches. At one end of the spectrum are prestigious and highly advertised consumer products. cassettes. Trademark Act prohibits imports of counterfeit goods into the United States.intellectual property (i. In addition to the direct monetary loss. trademark. a counterfeit trademark is a “ spurious trademark which is identical with.S. and copyrights are registered with the Federal Patent Office. and the Justice Department are concerned that MAI will lead to a rash of lawsuits against the United States. some counterfeit partially duplicate the original’s design and/or trademark in order to mislead or confuse buyers.. word. there are many small –time counterfeiters who could just pack up and go to a new location to escape police. a fairly complex set of rules governing the “conflict of laws” will be applied by the court or arbitration tribunal.S. it involves an infringement on a patent or trademark or both. In the United States. An associative counterfeit. Counterfeits include such fashionable products as Gucci and Louis Vuitton handbags. Controlling the counterfeit trade is difficult is part because counterfeiting is a low. Intellectual Property: Patents and Trademarks Patents and trademarks that are protected in one country are not necessarily protected in another. the result will be determined with the help the scales of justice. heart pacemakers. Walt Disney and Microsoft. with the intent of confusing or deceiving the public. As of mid. but the Environmental Protection Agency. where patents. INTERNATIONAL MARKETING place of performance of the contract. Low prosecution rates and minimal penalties in terms of jail terms and fines do not make a good deterrent.1998. may offer the firm a competitive advantage. the U. Piracy is particularly damaging to the entertainment and software industries. It is difficult and time consuming to obtain a search warrant. A third type of counterfeiting is piracy. A copyright bas now been extended to computer software as well.g. According to the U. It is a statutory t from the government (the Patent Office) to an inventor in exchange for public disclosure giving the patent holder exclusive right to the functional and design inventions patented and excluding others from using those inventions for a certain period of time. and so on) that is kept secret within a particular business.to ensure investment is undertaken in a manner that reflects sensitivity to environmental issues. musical. A trademark is a symbol.e. and trade secret are often use~ interchangeably. and compact discs are particularly easy to duplicate illegally. the patent holder retains all rights for the life of the patent even if the product is not produced or sold. Counterfeit goods injure the reputation of companies whose brand names are placed on low quality products. uses a product name that differs slightly from a well-known brand but is close enough that consumers will associate it with the genuine product. Agency for International Development. such as Pfizer animal feed supplement. such as Hennessy brandy.625. Sometimes. prospects for MAI approval in the United States were clouded. Individuals and firms have the freedom to own and control the rights to. dramatic. it must be heard and determined by a neutral party such as a court or an arbitration panel. a registered trademark. high profit venture. companies face indirect losses as well. plans. were awarded only $91 and $2.S. A true counterfeit product uses the name and design of the original so as to look exactly like the original. or imitation. which is the responsibility of the Copyright Office. rather than the object matter. the unauthorized publication or reproduction of copyrighted work.S. for mulas.risk. or thing used to identify a product made or marketed by a particular firm. On the other hand. computer Programs. A copyright protects the form of expression 42 © Copy Right: Rai University 11. In essence. so global marketers must ensure that patents and trademarks are registered in each country where business is conducted. or substantially indistinguishable from. Lanham Act. At the state level. Patent and trademark protection in the United States is very good and American law relies on the precedent of previously decided court cases for guidance. It becomes a registered trademark when the mark is accepted for registration by the Trademark Office.

S. The duration of the licensing agreement and the amount of royalties a company can receive are considered a matter of commercial negotiation between licensor and licensee. dramatic. in which a licensor allows a licensee to use patents. The right to sublicense is another important issue. Intellectual Property is a general term that describes Inventions or other discoveries that have been registered with government authorities for the sale ‘or use by their owner. Companies outside U. A patent is a government grant of certain rights given to an inventor for a limited time in exchange for the disclosure of the invention. The Sherman Act of 1890 prohibits certain restrictive business practices. it may be more desirable to form an association for the purpose of gathering information and evidence. the design of an electrical circuit. 3. Microsoft. Law enforcement agencies often believe that the crime does not warrant special effort. In some instances. After many years in Mexican courts and at least forty-nine legal decisions against the retailer. it is necessary to go after the distributors and importers in addition to the manufacturers of counterfeit goods. Ashton-Tate. Licensing and Trade Secrets Licensing is a contractual agreement. The law applies to foreign companies conducting business in the United States and extends to the activities of U. The strong export potential for bogus merchandise makes the: government there look the other way. used. and distort competition. To make the tactic effective. In many countries. A mask work is a new type of intellectual property. and there are no government restrictions on remittances of royalties abroad. misappropriation of trade secrets. Its best defense is to strike back rather than relying solely on government enforcement. and Word Perfect formed the Business Software Association as an investigative team. Boundaries as well if the company conduct is deemed to have an effect on US. Antitrust Antitrust laws are designed to combat restrictive business practices and to encourage competition. these elements of licensing are regulated by government agencies. In the United States. “Coke”).625. It is. The European Commission prohibits agreements ‘and practices that prevent. Finally. INTERNATIONAL MARKETING Definitions 1. This strategy reduces costs while increasing cooperation and effectiveness. or unfair competition fall into the category of intellectual property. Hong Kong. protected by the Semiconductor Chip Protection Act of 1984. 5. trade secrets. A copyright protects the writings of an author against copying literary. if not more so. “Trust-busting” era and are intended to maintain free competition by limiting the concentration of economic power. technology. or any other scheme designed to limit or avoid competition. Cartier was still unable to gain the cooperation of Mexican officials to close down the counterfeit. Commerce contrary to law similar laws are taking on increasing importance outside the United States as well.. allocating markets. The most important of these rights is” the one under which the patented invention tan” be made. When the cost of surveillance is high. copyright. some countries permit selective or exclusive product distribution. and palming off one person’s goods as those of another.2 © Copy Right: Rai University 43 . For example. Japan. because so many local manufacturers pay no attention to copyrights and patents. the company must invest in and establish its own monitoring. and New Zealand and has planned further legal action in Singapore. recently computer software-works are included within the protection of copyright laws. individual country laws Europe apply to specific marketing mix elements. name. Apple. in essence. Lotus. As with distribution agreements. Unfair competition is a very broad term defining legal standards of business conduct. AutoDesk. Many consumers understand neither the seriousness of the violation nor the need to respect trademark rights. Important considerations in licensing include analysis of what assets a firm may offer for license. The team was successful in providing information to authorities for the arrest of pirates. However. Japan. using similar corporate and professional names. one counterfeiter openly operated several “Cartier” stores in American owned hotels. the pattern of which is transferred and fixed in a ‘semiconductor chip during the manufacturing process.Just as critical. and artistic-and more 11. or symbol which is used in trade to distinguish a product from other similar goods (e. It is not sufficient for a company to fight counterfeiting’ only in its home country. The battle must be carried to the counterfeiters’ own country and to other major markets. In Mexico. laws do not regulate the licensing process per se as do technology transfer laws in the EU.S. Apple has filed suits against imitators in Taiwan. Such terms as patent. including fixing prices. American antitrust laws are a legacy of the 19th-century U. The overall idea is to prevent bogus goods from entering the industrialized nations that make up the major markets. limiting production. A trademark relates to any work. restrict. system. how to price the assets. Trademark laws are used to prevent others from making a produced with a confusingly similar mark. decisions must also be made regarding exclusive or nonexclusive arrangements and the size of the licensee’s territory. It provides protection against such things as simulation of trade packaging.g. 6. Australia. trademark. community law can take precedence. Australia. Similar rights may be acquired in marks used in the sale of advertising of services (service marks). or sold only with the authorization of the patent owner. One computer firm in Taiwan allows consumers to bring in fakes that it then exchanges for the purchase of genuine computers at a discount. whether to grant only the right to “make” the product or to grant the rights to “use” and to “sell” the product as well. or other intangible assets in return for royalty payments or other forms of compensation (see Chapter 8 for a discussion of licensing as a marketing strategy). and many developing countries. 4. and Western Europe. The problem is severe in Taiwan. 2.S. musical. is the attitude of law enforcement agencies and consumers. trademarks.

Manufacturers also feel that these discounters deceive buyers by implying that gray market have the same quality and warranties as items sold through authorized channels. As a rule. Unlike the black market. 44 © Copy Right: Rai University 11. Through this extra channel. They feel that manufacturers try to have it both ways tolerating gray marketing when they need to get rid of surplus merchandise INTERNATIONAL MARKETING Branch Versus Subsidiary One legal decision that an MNC must make is whether to use branches or subsidiaries to carry out its plans and to manage ‘its operations in a foreign country. However. which is clearly illegal the gray market. in order. There are several reasons why a subsidiary is the preferred structure. They are also expensive. One reason has to do with recruitment of management. in contrast. multinationals prefer subsidiaries to branches. whether gray market goods are illegal or not could not be answered with a great degree of certainty. A top administrator of an overseas operation wants a prestigious title of president chief executive. Coca-Cola. the EU’s elimination of non-tariff barriers and border controls has made it possible for parallel imports to move freely across the EU.To prevent the licensee from using the licensed technology to compete directly with the licensor. as its name implies. Although a parent company has total control when its subsidiary is wholly owned. When this happens. because one out of every four Seiko watches imported into the U. suppliers and distributors of products in one member state cannot use exclusive sales arrangements to conspire to block parallel imports of identical products from dealers in other member states. a branch manager. A subsidiary may be either wholly owned (i. Therefore. and electronic goods. the hitter may try to limit the licensee to selling only in its home country.S. Titles mean a great deal in virtually all parts of the world. gray market goods move. At one time. and IBM is to have wholly owned subsidiaries. internationally as well as domestically.2 . is neither black nor white-legality is in doubt. perfumes. Gray market goods can be purchased. Licensing is a potentially dangerous action: It may be instrumental in creating a competitor. This is a good example of the economic force” at work. and EU antitrust laws. resulting in price competition. would go -through the trouble and. Although physically detached. When compared to the use of branches. or managing director rather than being merely. GE receives some $1 billion in revenues from its wholly owned and partially owned subsidiaries in Europe. There is a simple rule: If you are licensing technology and know-how that are going to remain unchanged. identical items can carry two different retail prices. Asian countries in general and Hong Kong in particular are favorite targets because the wholesale prices there are usually much lower than elsewhere. A subsidiary. requiring substantial sales volume to justify their expense. Products notably affected by this method of operation include watches. primarily the United States. cameras. like other MNCs. the use of subsidiaries adds complexity to the corporate structure. The licensor may also seek to contractually bind the licensee to discontinue use of the technology after the contract has expired. to conceal identity and purpose.. Gray marketers naturally see the situation differently. In practice.625. automobiles. The usual practice of Pillsbury. Although there are several causes. (2) price differences among these sources of supply are great enough. A branch is the company’s extension or outpost at another location. This requires constant innovation. is both physically and legally independent. At one time. A gray marketer can acquire goods in two principal ways. imported. The problem is particularly acute for Seiko. host government laws. may make such agreements impossible to obtain. As a result. Under the ED concept of parallel imports. Such actions are a violation of EU antitrust laws. Fiat has 432 subsidiaries and” minority interests within 130 companies in sixty countries. it is difficult to generalize about the superiority of one approach over the other. and resold by an unauthorized distributor at prices lower than those charged by manufacturer-authorized importers/distributors. expense of forming hundreds of foreign companies elsewhere. One method is to place an order directly with a manufacture by going through an intermediary. There is no justification for the existence of the gray market unless prices in at least two domestic markets differ to the extent that even with extra transportation costs reasonable profits can be -made. and (3) the legal and other barriers to moving goods are low. market is unauthorized.S. it is only a matter of time before your licensee will become your competitor not merely with your technology and know-how but with improvements on that technology and know-how. Parallel importation of trademarked products occurs for several reasons: (1) gray marketers can easily locate sources of supply because many trademarked products are available in markets throughout the world. The question that must be asked is why Fiat. To manufacturers and authorized dealers. it is not legally separated from its parent. you are history. a gray market product is one imported by an unauthorized party. Gray marketing of a product within a market often takes place because of the channel structure and margins. price differential is the only true reason for the gray market to exist.” Gray Market Gray market exists when a manufacturer ends up with an unintended channel of distribution that performs activities similar to the planned channel-hence the term parallel distribution. certain exclusive sales territories were supported by nontariff barriers between member states of the European Union. parallel distributors are nothing but freeloaders or parasites who take advantage of the legitimate owners’ investment and goodwill. context. A manufacturer who wants to eliminate the potentially profitable gray marketing activity should restructure its pricing and discount policies. The importance of the gray market even gets some countries to specialize in handling such goods for the third country.e. licensors should be careful to ensure that their own competitive position remains advantageous. It is considered a separate legal entity in spite of its ownership by another corporation. Another method is to buy the merchandise for immediate shipment on the open market overseas. In an international. 100 percent owned) or partially owned. including U.

The World Trade Organisation and Its Role in International Trade In 1948 when 23 countries underlined in the General Agreement on Tariffs and Trade (GATT) their determination to reduce import tariffs. such goods are adulterated. if not better. This is due in part to differences in language. compete. This move sends loud signals of commitment to distributors who abide by the terms of the franchise agreement. a spirit of confrontational competitiveness. this was considered a milestone n international trade relations. The United states ha more lawyers than any other country in the world and is arguably the most litigious nation on worth. where a company and its attorneys might be said to enjoy “ home court” advantage. a means capable of delivering the same goods to consumers at a lower but fair price under the free enterprise system. There are several strategies for this purpose. which is a violation of the Sherman and Clayton Acts.625. and the loss of goodwill follows when consumers are unable to get proper repair. trademarks are designed to counter fraud rather than limit distribution. Dispute Settlement. currencies. Gray marketers. establish joint ventures. part.S. They may have to service goods sold by parallel competitors. The issue can be litigated in the united states.2 © Copy Right: Rai University 45 . With regard to the charge that gray market goods are inferior. sell. none of these principles is fully realized as yet. especially when different cultures come together to buy. In 11. however. For all these reasons. Conflict Resolution. however. Manufacturers and authorized suppliers definitely see the need to discourage gray marketing. secondrate.and condemning gray marketers when that need subsides. although much progress as made during the Uruguay Round on issues such as no tariff barriers. manufacturers and authorized dealers refuse to service such goods by pointing out that gray market good are not for U. discovery is the process of obtaining evidence to prove claims and determining which evidence may be admissible in which countries under which conditions. Some parallel distributors have even sued Mercedes-Benz for restraint of trade. which are encouraged by the GATT through a prohibition of all forms of protection except customs tariff air trade is the third principle. Concerning the inferior warranty and the manufacturer’s refusal to service gray market goods under warranty terms. The degree of legal cooperation and harmony in the EU is unique and stems in part form the existence of code law as a common bond. A further complication is the fact that judgments handed down in courts in another country may not be enforceable in the home country. the dispute with a foreign party is frequently in the home country jurisdiction. warranties.S. Other regional organisations have made for less progress toward harmonization. becomes vastly more complex.000 people 290 242 141 80 79 79 11 3 Problems arise from differences in procedures relating to discovery. According to them. and consumers may be misled into believing that they receive identical products with U. And Litigation Countries vary in their approach toward conflict resolution. this is a refection of the low context nature of American culture. and cooperate in global markets for American companies. In essence. The arguments used by both sides are legitimate and nave merits. As such. there is really no proof that the products they handle are inferior. protection of intellectual property rights. but it ignores transaction costs and forecloses valid price discrimination opportunities among classes of customers who are buying very different benefits in the same product. Therefore. The first concerns nondiscrimination. They lose market. and traditional business customs and patterns. and government subsidies. It is inconceivable that a manufacturer would stop a production line just to make another product version for the non U. and the absence of tone important principle of code law the loser pays all court costs for all parties. consumption.’ A one price-for-all policy can eliminate an important source of arbitrage. parallel distributors show no concern because they have their own warranty service centers that can provide the same. market. gray market goods are genuine products subject to the same stringent product control. legal systems. Their service offers are often closer to the market being served. Gray marketers also point out that they would not survive in the long run if they did not provide service and quality assurance. share as well as control over price. The second principle is open markets. but this approach may create disputes among current distributors. service. Parallel distributors claim to align themselves more with consumers by providing an alternative and legal means of distribution.S. which prohibits export subsidies on manufactured products and limits the third principle. many companies prefer to pursue arbitration before proceeding to litigate. and each strategy has both merits and problems. Gray marketers also accuse manufacturers of not wanting to be price competitive and view manufacturers distribution restrictions as a smokescreen for absolute price control. As pointed out by them. GATT is based on three principles. Only one thing is certain: authorized suppliers are adversely affected by parallel distribution. Litigation in foreign courts. or discontinued articles. Another strategy is to add distributors (perhaps former gray market distributors to the network. which prohibits export subsidies on manufactured products and limits the use of export subsidies on primary products. INTERNATIONAL MARKETING Country United states Australia United kingdom France Germany Hungary Japan Korea Lawyers per 100. In addition. do not buy this argument. disenfranchisement of offenders is a stock response. Conflicts will inevitably arise in business anywhere. In reality. each member country must treat the trade of all other member countries equally. Although tracking down offenders’ costs money.

Italy GreeceFinlandSwedenNetherlands Bans all forms of tobacco advertising Bans all advertising of toysBans speed as a feature in car advertisingBans television advertising directed at children under age 12Bans claims about automobile fuel consumption Another major breakthrough at the Uruguay Round was the establishment of the world Trade Organisation (WTO) in 1995. For protection of human rights. since its installation in 1995. These laws have been a contributing factor to the trade deficit of the United States. they may not result in the accomplishment of the desired goal. Reebok and Levi Strauss have done this by establishing standards that their contractors must follow. the Reagan administration “[applied] human rights standards inconsistently between perceived allies and foes. EI Salvador. which replaced GATT. The strictest adherence to this policy occurred during the carter years. “ trade bands on goods produced by child labor could have the unintended effect of forcing the children into other paid work at a lower wage” and/ or prostitution. Laws and Exports Assistance or Hindrance? The United States has many laws that have made exports difficult. Even when the sanctions are effective. Repeated pressures on EI Salvador. WTO as a permanent institution is endowed with much more decision making power in undecided cases. Nike is well aware of this problem. policy of opposing restrictive trade practices imposed by foreign countries against other countries friendly to the United States. Nike sources its goods in countries with low wages and poor labor regulations. U. A recent survey of companies in 22 countries found that 78 percent of boards of directors were establishing ethical standards.s. is unable to get the needed materials and technology from the United States in spite of its willingness to sign the treaty. American firms are urged to refuse any request to support such boycotts and are required to report such’ a request to the Office of Ant boycott Compliance (OAC). An increasing number of companies are addressing ethical issues. Czechoslovakia Nicaragua and the former Soviet Union. on the other hand. A case in point it the use of child labor or allegations of its use. In contrast to GATT. for example. after overthrowing those dictators. and Turkey.2 . and it is naive to believe that leaders would not consider using nuclear weapons just because a treaty has been signed. companies may suffer when negative publicity is generated. A program has been established by Nike to monitor its suppliers but it is difficult when some locals may argue in favor of child labor. Although Nike does not directly employ children in its overseas manufacturing the sourcing agent may. Yet it has been widely debatable whether the new regimes. is able to substantially secure much of what it needs anyway. and they actively monitor results to ensure that standards are met. Regarding child labor in Pakistan. Australia and new Zealand.S. While criticizing in the rights abuses in Cuba. India. The US Department of Labor has many publications on this specific issue. vary around the world. During its 50 years of existence.S.S. These extended competencies have become manifest in visible consequences. This is up significantly from 21 percent in 1987.S. A concern over the use of nuclear weapons prompts the United States to limit exports of nuclear reactors and material to any countries that may produce a nuclear bomb. Export Administration Regulations applies to nuclear weapons and explosive devices. respectively.S. 46 © Copy Right: Rai University 11. The purpose of the law is not to challenge any country’s sovereign right to boycott products from another nation. citizens from being used as tools of another nation’s foreign policy.” What is most bothersome to many Third World critics is the idea that only the superpowers or developed nations know how to use nuclear weapons’ “responsibly.S. Loans were withheld from South Africa. human rights policy has served a useful purpose in some instances. Israel. which led to severe restrictions on trade with countries that violated the human rights code. The study also warns that regional differences can hinder effective implementation of any efforts. Japan. have provided desirable alternatives. Export Administration Act of 1977 has anti boycott provisions that establish a U. According to two private groups (Human Rights Watch and the Lawyers Committee for Human Rights). the WTO has already dealt with 200 cases. which was more loosely organised. In order to “do the right thing” but also generate good publicity. Nuclear Nonproliferation Treaty Section 378. South Africa.” Other questions related to the restrictions involve whether the end justifies the means and whether the restrictions are effective. It is difficult to believe that a country would prefer to lose a war with dignity rather than “winning ugly. and Chile. yielded few concrete results. The anti boycotts provisions specially prohibit U. What is acceptable in one country may be considered unethical in another. which administers-the law. there are regulations for export of crime control and detection instruments and data to all countries except NATO members. the. Critics of the law believe that if a country wants nuclear materials it will find a source. the U. despite refusing to sign the Nuclear Nonproliferation Treaty. just as the legal environment. {Honduras. In addition to the obvious moral questions.” Human Rights Policy The human rights policy of the United States at times interferes with America firms’ business activities.United States as at times ignored or tolerated similar abuses in Haiti. but rather to prevent U.1 of the U. Critics charge that the United States has been arbitrary in the application of its sanctions. Nevertheless.625. Kenya. Uruguay. Antiboycott Regulations The U. companies can take an active approach to ethical issues. There was overwhelming evidence of human rights violations in Iran and Nicaragua during the administrations of the Shah and President Somoza. only 300 complaints in international trade disputes were filed with GATT. persons from : INTERNATIONAL MARKETING Ethical Issues Ethics.

foreign policies. But the law is ambiguous.S. As a result. Do you agree with the rationale of these laws from the perspectives of national security.allowed exporters to form export trading companies so that they could pool resources under antitrust exemptions. Safeway Stores Inc.the law among the Treasury. Antitrust Laws U. exporters must deal with varying-definitions and-interpretations of. In the 1980s. Critics of the regulations contend that the United States should not make health. and trade? INTERNATIONAL MARKETING © Copy Right: Rai University 47 . and a violation-of the act is punishable by fines and jail terms. and environmental decisions for citizens of other countries. religion. They may make sense-from the standpoint of foreign policy. For example.S. the antitrust restrictions appeared to be relaxing.S. persons on the basis of race. laws cited above. these laws are -clearly disadvantageous to American firms. which require U. The previous largest ant boycott penalty was a $323. To settle the charges that Safeway had illegally complied with the Arab boycott. The trade is the criterion. standards may make certain products either unavailable or too expensive for foreign consumers. The problem that some businesses see is that U.“Refusing to do business with black listed firms and boycotted countries friendly to the United States pursuant to foreign boycott demands.625. sex. standards over American firms’ overseas operations. And it increases delays as well as the cost of doing-business. or national origin to comply with a foreign boycott. provides technical and management assistance to Arab-owned stores in Saudi Arabia and Kuwait. The health. and environment rules thus enforce strict U. The company’s agent must get an expense account validated by the American consular authority before receiving a payment for expenses as routine as a taxicab ride. exports. Health.000.” In response to the Arab nations’ boycott of Israeli-made goods. Discriminating’ against other U. the United States has adopted anti-Arab boycott rules. Despite new rules. and Justice departments.S. Furnishing information about their business relationships with boycotted countries or blacklisted companies. A 1982 Jaw. Safeway also furnisher information about its dealings with Israel to the Israel Boycott Office of Kuwait. Safeway paid the Department of Commerce $995. Foreign Corrupt Practicess Act (FCPA) This act greatly limits corporate payments of fees to obtain a foreign contract. safety.2 good intentions. which refused to do business with companies on the anti-Israeli blacklist. their appropriation’s depends on the criteria used to judge them. Safety And Environmental Regulations These regulations are based on the assumption that what is good for the United States is good for other nations. by. exporters to forego Arab contracts that prohibit the inclusion of goods from Israel.000 fine paid. The U. safety.S.Furnishing information about another person’s race. Commerce. a person associated with a company must certify that there is no bribe of immoral act practically every time business is transacted. religion sex or national origin where such information is sought for boycott enforcement purposes. Safeway managers told customers and suppliers not to do business with Israel or with blacklisted companies. h9wever. in one way or another. antitrust regulations result in a reluctance on the part of American firms to form joint trading companies or to bid jointly on major overseas projects. with a trend toward mega mergers. Although these laws ‘“may have been enacted with 11.Citicorp. impede U.S.S.

It is remarkable that the same countries(Italy. it is relatively stable and somewhat permanent. from 5 percent in Spain to 39 percent in Belgium. It must be shared by members of a society. The prescriptive characteristics of culture simplifies a consumer’s decisionmaking process by limiting product choices to those which are socially acceptable. or virility). only non economic factors can explain the different patterns of consumption of two individuals with identical incomes-or by analogy. The growing use of anthropology. shared by the members of a group. however. What is acceptable in one culture may not necessarily be so in another. although green is a highly regarded color in Moslem countries. the more difficult they are to change. Consumption is a function of many other cultural influences as well. Culture is prescriptive. for microwave ovens. for dishwashers. and symbols that shape human behavior and that are transmitted from one generation to the next. which are transmitted from one generation to another. Only cultural difference can account for these variables. must be based on social interaction and creation. We now know that it is not enough to say that consumption is a function of income. 6. Culture is enduring.625. Second. the process of acculturation occurs. from 11 percent in the Netherlands and Spain to 34 percent in Germany. The ability to learn culture makes it possible to absorb new cultural trends. including family. Culture usually imposes common habits of thought and feeling among people. People in different cultures often have different ideas about the same object. A culture acts out its ways of living in the context of social institutions. 3. Preference for color is culturally influenced as well. we must acquire a knowledge of diverse cultural environments in order to achieve successful international marketing.2 Basic Aspects of Society and Culture Anthropologists and sociologists define culture as “Ways of Living “. Red is a popular color in most parts of the world (often associated with full flavor.INTERNATIONAL MARKETING LESSON 8: SOCIAL & CULTURAL ENVIRONMENT Marketing has always been recognized as an economic activity involving the exchange of goods and services. 2. For automatic washing machines the range is from 72 percent in Sweden to 96 percent in Italy. Culture is not inherited genetically-it must be learned and acquired. Of course. Only in recent years. there is no inherent attribute to any color of the spectrum. White. culture is “the collective programming of the mind that distinguishes the members of one category of people from those of another”. It prescribes the kinds of behaviour considered acceptable in the society. Old habits are hard to break. Culture is learned. most anthropologists share two additional views. ideas. remove our culturally tinted glasses to study foreign markets. But culture may also impede communication across groups because of a lack of shared common cultural values. built up by a group of human beings. within a given group culture makes it easier for people to communicate with one another. of two different countries with similar per capita incomes. Culture. can signify death in Asian countries. usually associated with purity and cleanliness in the West. from 6 percent in Italy to 37 percent in Sweden. governmental. or passing fads and styles. because it is 48 © Copy Right: Rai University . Because culture is shared and passed along from generation to generation. 5. passion. sociology and psychology in marketing is explicit recognition of the noneconomic bases of marketing behaviour. religious. As defined by organizational anthropologist Geert Hofstede. We must. A review of consumer durables ownership in EU countries with similar income levels shows the importance of nonincome factors in determining consumption behaviour. however. First. In this sense. it is associated with disease in some Asian countries. so to speak. culture defines the boundaries between different groups. revealing marketing as a cultural as well as economic phenomenon. Culture is socially shared. One useful function provided by culture is to facilitate communication. represent learned responses that are highly variable from culture to culture and can have a major impact on consumer behavior. Sweden) can be at the highpenetration level for some appliances and at the low-penetration level for others. Because our understanding of marketing is culture bound. for example. it is poorly received in some African countries. Culture is subjective. all facets of culture are interrelated: Influence or change one aspect of a culture and everything else is affected. This explains why India and 11. if a person learns the culture of a society other than the one in which he or she was raised. Netherlands. are learned. attitudes. Thus. culture is both unique and arbitrary. have sociocultural influences been identified as determinants of marketing behaviour. In this regard. from 56 percent in Italy to 98 percent in the Netherlands. Culture consists of learned responses to recurring situations. Culture and Its Characteristics 1. Socialization or enculturation occurs when a person absorbs or learns the culture in which he or she is raised. culture does not include one-time solutions to unique problems. Taste and preferences for food and drink. for clothes dryers. Furthermore. Culture facilitates communication. For example. out of necessity. In contrast. 4. educational. It cannot exist by itself. for vacuum cleaners. Culture includes both conscious and unconscious values. In addition to agreeing that culture is learned. thus acting to reinforce culture’s prescriptive nature. and people tend to maintain its own heritage in spite of a continuously changing world. The earlier these responses. all associations and perceptions regarding color arise from culture. not innate. and business institutions.

TRUE EUROPEANS Consumer demands vary widely from one European country to another. courtship. A universal is a mode of behavior existing in all cultures. as if eating were a mere necessity. INTERNATIONAL MARKETING Cultural Dimension-1 Meaning of Time The work week in many Middle Eastern regions runs from Saturday to Thursday. After acquiring Phillips’s European appliance business. Understandably. accepted as a form of artistic expression and source of entertainment. education. in contrast. food taboos. Gift giving is also not a normal custom in Belgium or Britain.625. Exchanging gifts is rare and inappropriate in Germany. and gifts are usually exchanged at the first meeting. religious rituals. a rock rhythm for North America. the government decided to drop the lottery idea. On the manufacturing side. cooking. it is an honor to be invited to have dinner at a private home-a sign of real friendship. In the United States. it is offensive to offer a gift. despite severe overcrowding. Muslims launched a protest because Yokohama Rubber Co automobile tires had a tread pattern resembling the Arabic word 11. The company soon stopped making these tires and offered to replace the tires free of charge. Culture is passed along from generation to generation. A jingle might utilize a bossa nova rhythm for Latin America. family feasting. Romanians. The Language of Friendship In India. as exemplified by the ten-course meal in China. Each generation adds something of its own to the culture before passing the heritage on to the next generation. When should it be presented-on the initial visit or afterwards? Where should a gift be presented-in public or private? What is the type of gift to give. dancing.The astute global marketer often discovers that much of the apparent cultural diversity in the world turns out to be different ways of accomplishing the same thing. long courtship. Germans. Music is part of all cultures. The Chinese view a large family as a blessing and assume that children will take care of parents when growth old. In many countries. In Guatemala. Pillsbury is one company that owes its success in Japan to an ability to adjust to the radically different style of doing business there. and how many people should receive gifts? In Japan. and Japanese are very punctual. and sincerity were all understood by Pillsbury’s management. residence rules. Culture is dynamic. Culture is cumulative. people finish their meals in a hurry. Although it is rude for a Japanese to be late for a business meeting. Culture also affects attitudes toward punctuality. al. culture is constantly changing-it adapts itself to new situations and new sources of knowledge. and trade. Whirlpool moved to transform sales and distribution systems in thirteen countries into two pan-European operations. ethics. Egypt and China. On the other hand. dinner is a social event in itself. gift giving is an important part of doing business. In Italy. The Search For Cultural Universals An important quest for the global marketer is to discover cultural universals. Businesspeople should attempt to find out how to present gifts. have a great difficulty with birth control. Music. However. Whirlpool cut costs Cultural Dimension-2 The Language Of Religion A government itself can also make a religious mistake. trust. Thus. medicine. The French cook their food at high temperatures and thus splatter grease onto oven walls. language. Far from being the case. punctuality is a function of occasion. though background music can be used effectively in broadcast commercials. taken from cultural anthropologist George P. property rights. Religious leaders and students called the lottery immoral and corrupt. but flowers are a suitable gift when invited to someone’s home. any business discussion at dinner would be inappropriate. 8. it is insulting when gifts are not presented since they are expected. but one should not assume that culture is static and immune to change. it is acceptable(and perhaps even fashionable) to be late for a social occasion. However. is a cultural universal that global marketers can adapt to cultural preferences in different countries or regions. The tire maker apologized for its lack of knowledge of Islam and stated that the tread was not meant to blaspheme Allah. The Oriental values of old friends. Universal aspects of the cultural environment represent opportunities for global marketers to standardize some or all elements of a marketing program. it is customary to have lunch hours of two to four hours. body adornment. The Art Of Gift Giving Businesspeople need to understand customs of gift giving. In certain countries. Latin Americans have a relaxed attitude toward time. mourning. what should its color be. music is also an art form characterized by widely varying styles. decorative art. and then quickly get on to the purpose or objective for having had the dinner. Culture is based on hundreds or even thousands of years of accumulated circumstances.China. After weeks of growing Muslim demonstrations. marriage. Pillsbury saw its joint venture as like a marriage in a society where a divorce is frowned upon. most French consumers want selfcleaning ovens. etiquette. The Germans. music. then. The tread was designed by computer to maximize driving safety. and thus took great pains to learn the accepted way of doing business there. the controversy erupted. and those values were kept in mind when Pillsbury decided to conduct business in Japan. and “high life” for Africa. the type of music appropriate for a commercial in one part of the world may not be acceptable or effective in another part. mealtime. In some countries. do their cooking at lower temperatures and do not have much demand for this feature.2 © Copy Right: Rai University 49 . making it an all-evening affair. Therefore. for Allah. A partial list of cultural universals. status differentiation. Murdock’s classic study. 7. a person may choose to arrive anytime from ten minutes to forty-five minutes late for a luncheon appointment. Music provides one example of how these universals apply to marketing. includes the following: athletic sports. As soon as Indonesia announced its plan to introduce state lottery.

has been positioned as a new sound. When Warner Bros released “Lethal Weapon 4” in Hong Kong. music. Technology includes the techniques used in the creation of material goods. scenes from the film were interspersed on the video. A couple of examples: 1. The song became the movie’s “Asian theme song”. French consumers would not accept front loaders because French kitchens have only enough space for the narrow. Education. 2. These cultural constraints can affect all aspects of the marketing program. top-loading machines. Economics Material Culture is divided into two parts. its major promotion was a music video with a very popular heavy-metal band. is easy to use and trouble free. Cosmetics : Maybelline and Max Factor add brighter colors to their lipstick and makeup for Latin America. means of exchange.2 The global marketers in the business are always alert toward the potential of extending a successful act across national boundaries. Heineken and BMG Entertainment are some of the companies breaking down cultural barriers as they expand into new markets with their products. technology and economics.INTERNATIONAL MARKETING by standardizing parts and materials which account for 55 percent of an appliance’s total cost. They are: Material Culture : Technology. it is the technical know-how possessed by the people of a society. Visa and Master Card International. and political structures that are concerned with the ways in which people relate to one another. food and drink are converging. Though music didn’t relate to the film. the vast majority of U. found that many of the differences in countries had less to do with consumer tastes but more to do with the fact that French manufacturers have always made only top loaders. they did not even share one screw. sensous. British and Italians like true Europeans due to their similarities.Many feel that she has great potential for global markets. Electric can openers and electric juicers are acceptable in the United States. and does not use too much electricity. the quality and types of products demanded. IBM. or detergent. the success of Robyn. The scope of the term culture to the anthropologist is illustrated by the elements included within the meaning of the term. There is great variation in the world in the use of credit and debit cards and cash. total picture is to emerge. and international. there has evolved a culture scheme that defines the parts of culture. Pepsi. and even significantly accelerated. Levi Strauss. education. consumption. citizens understand the simple concepts involved in reading gauges. organize their activities to live in 11. Amway’s 50 © Copy Right: Rai University . clothing or food. If a machine can meet these significant criteria. the volume of global credit card sales surpassed $2 trillion in the year 2000. Japan is a cash and debit card culture. by companies that have seized opportunities to find customers around the world. consumer taste can change because such features as where the machine opens and its size are less important. electrical appliances sell in England and France but have few buyers in countries where less than 1 percent of the homes have electricity. water.625. a vocalist from Burundi who sings in Swahili and French. they would be a spectacular waste because disposable income could be spent more meaningfully on better houses. Before the move. Social Institutions : Social organizations. and their functional features. and the United States is a credit card culture. For the marketer. Culture includes every part of life. For example. Kadja Nin. It has long been argued that national tastes dictate the kind of washing machine to be sold in a certain market. such as Malaysia. To implement this goal. the same thoroughness is necessary if the marketing consequences of cultural differences within foreign market are to be accurately assessed. Coca-Cola. Therefore. therefore. As a result. Economics is the manner in which people employ their capabilities and the resulting benefits. Material culture affects the level of demand. Elements of Culture The anthropologist studying culture as a science must investigate every aspect of a culture is an accurate. Promotion : Hollywood has found the best way to promote its movies in Asia is to use popular local musicians. The marketing implications of the material culture of a country are many. but in many countries of the world this seemingly simple concept is not part of their common culture and is. the credit card companies and on-line marketers has to chose communication efforts to persuade large numbers of people to use the cards. which overshadow their differences. and the income derived from the creation of utilities. color. Whirlpool has treated Germans. Increasing travel and improving communications mean that many national attitudes toward style in clothing. a leading female singer made a music video based on “The English Patient”. According to one estimate. first in Sweden and northern Europe established her potential to go beyond these markets. For example. the washing machine made in Germany and the one made in Italy did not contain any common parts. Similarly. their distribution. In Taiwan. Europe is more of a check and debit card culture. The globalization of culture has been capitalized upon. McDonald’s. Political Structures Social Institutions include social organization. Vidal Sassiin adds more conditioner and a pine aroma to some shampoos in the Far East. For example. Culture Shapes Foreign Marketing International marketers all have stories to tell of their adventures-and misadventures-in foreign market cultures. Whirlpool Corp however. Included in the subject of economics is the production of goods and services. Even with electrification. new laws and changing attitudes toward the use of credit are providing huge global opportunities for financial service providers such as American Express. as well as the means of production of these goods and their distribution. economic characteristics represented by the level and distribution of income may limit the desirability of products. skin care line in Japan has less lather and Amway removes the pork proteins found in some of its products for Muslim markets. but in less-affluent countries not only are they unattainable and probably unwanted. Whirlpool’s study of laundry habits revealed that consumers across Europe want a washing machine that get clothes clean. The studios usually don’t even have to pay the local artists because both parties benefit. a major technical limitation. a Swedish vocalist who sings in English.S.

New Guinea. In cultures where the social organizations result in close-knit family units. for instance. Religion impacts people’s habits. that is.625. One authority suggests that we look for a cultural translator. create a negative impression. even the newspapers they read. offensive. It is not sufficient to say you want to translate into Spanish. Advertising copywriters should be concerned less with obvious differences between languages and more with the idiomatic meanings expressed. for example. phases of the moon. because. Customers everywhere respond to images. The successful marketer must achieve expert communication. and Peru. and. and this requires a thorough understanding of the language as well as the ability to speak it. Aesthetics : Graphic and Plastic Arts. render marketing efforts ineffective. group behaviour. Some 750 languages. head-bump reading. and such influence can extend to the acceptance or rejection of promotional messages as well. foreign marketers should never take it for granted that they are communicating effectively in another language. Product styling must be aesthetically pleasing to be successful. the family. its arts. it is easy to offend. Music. the products they buy. Language The importance of understanding the language of a country cannot be overestimated. shi. Tambo. social classes. music. Until a marketer can master the vernacular. Such was the case when Saudi Arabian customs officials impounded a shipment of French perfume because the bottle stopper was in the shape of a nude female. and behaviour are frequently affected by religion. is also the Japanese word for death. The uniqueness of a culture can be spotted quickly in symbols having distinct meanings. The Japanese. as must advertisements and package designs. and in Chile. means a roadside inn in Bolivia. Ecuador. Each of the social institutions has an effect on marketing because each influences behaviour. however. The impact of religion on the value systems of a society and the effect of value systems on marketing must not be underestimated. Drama and Dance Closely interwoven with the effect of people and the universe on a culture are its aesthetics. What might seem innocent and acceptable in one culture could be considered too personal or vulgar in another. color. The literacy rate of a country is a potent force in economic development. Aesthetics are of particular interest to the marketer because of their role in interpreting the symbolic meanings of various methods of artistic expression. Colombia. focusing too much attention on bodily functions in advertisements would be judged immoral or improper and the products would be rejected. each distinct and mutually unintelligible. What an American might consider as mere superstition can be a critical aspect of a belief system in another culture. that is. folklore. According to the World Bank no country has been successful economically with less than 50 percent literacy. Insensitivity to aesthetic values can offend. clothing. one of the most important social institutions. When the marketer has little or no understanding of a religion. values and the overall patterns of life. the problem of effective communications may still exist. ghosts. Astrologers are routinely called on in Thailand to determine the best location. but when countries have invested in education the economic rewards have been substantial. a person who translates not only among languages but also among different ways of thinking and among different cultures. consider communicating with the people of Papua. albeit unintentionally. In some countries. Language may be one of the most difficult cultural elements to master. The positions of men and women in society. Literacy has a profound affect on marketing. superstitions. and govern themselves. demons. It is much easier to communicate with a literate market than to one where the marketer has to depend on symbols and pictures to communicate. INTERNATIONAL MARKETING 11. or just plain ridiculous. Without a culturally correct interpretation of a country’s aesthetic values. even then. and standards of beauty in each culture. are spoken there.harmony with one another. Education. Strong symbolic meanings may be overlooked if one is not familiar with a culture’s aesthetic values. Humans and the Universe-belief Systems Within this category are religion (belief systems). If that gives you a problem. in parts of Asia. it means a dairy farm. Numerous studies indicate a direct link between the literacy rate of a country and its ability for rapid economic growth. for example. revere the crane as being very lucky for it is said to live a thousand years. and soothsayers are all integral parts of certain cultures. in general. teach acceptable behaviour to succeeding generations. age groups and how societies define decency and civility are interpreted differently within every culture. Many believe that to appreciate the true meaning of a language it is necessary to live with the language for years. affects all aspects of the culture from economic development to consumer behaviour. Folklore. in Spanishspeaking Latin America the language vocabulary varies widely. Carelessly translated advertising statements not only lose their intended meaning but can suggest something very different. it is more effective to aim a promotion campaign at the family unit than at individual family members. in Argentina and Uruguay. the aid of a national within the foreign country should be enlisted. their outlook on life. and dance. and metaphors that help them define their personal and national identities and relationships within a context of culture and product benefits. obscene. fortune telling. Acceptance of certain types of food.2 © Copy Right: Rai University 51 . Whether or not this is the case. the way they buy them. a tambo is a brothel. but it is the most important to study in an effort to acquire some degree of empathy. Religion is one of the most sensitive elements of a culture. a whole host of marketing problems can arise. the use of the number four should be avoided completely because the word four. myths. for example. and their related power structures. drama. Travel advertising in culturally divided Canada pictures a wife alone for the English audience but a man and wife together for the French segments of the population because the French are traditionally more closely bound by family ties. Superstition plays a much larger role in a society’s belief system in some parts of the world than it does in the United States. palmistry. For example.

each culture is different. He hypothesized that people’s desires can be arranged into a hierarchy of five needs. Maslow’s hierarchy of needs is. Other researchers have shown that a person’s needs do not progress neatly from one stage of a hierarchy to another. The fox is the symbol of fertility. friendship. Here are a few suggestions: Japan Do not open gift in front of a Japanese counterpart unless asked and do not expect the Japanese to open your gift. there is a tendency among some consumers in high-income countries to reject material objects as status symbols. in Germany today.2 © Copy Right: Rai University . And yet. more and more members of society operate at the esteem need level and higher. SELF-ACTUALIZATION ESTEEM SOCIAL INTERNATIONAL MARKETING SAFETY PHYSIOLOGICAL Analytical Approaches to Cultural Factors The reason cultural factors are a challenge to global marketers is that they are hidden from view. and social needs have been satisfied. Do not wrap flowers in paper. Gifts should be given during social encounters. an irony of modern times is the emergence of the need for safety in the United States. Maslow’s model implies that. safety. the hierarchy does suggest a way for relating consumption patterns and levels to basic human need-fulfilling behavior. the badger. Latin America Do not give a gift until after a somewhat personal relationship has developed unless it is given to express appreciation for hospitality. China Never make an issue of a gift presentation-publicly or privately. Becoming a global manager means learning how to let go of cultural assumptions. Avoid the colors black and purple. and the number 13. self-esteem. As an individual fulfills needs at each level. This trend toward rejection of materialism is not. When all the needs for food. In India. of course. Europe Avoid red roses and white flowers. While the two lowerlevel needs are the same as in the traditional hierarchy. discontent and restlessness will develop unless one is doing what one is fit for. and some consumers are turning away from material possessions. Helmut Schutte has proposed a modified hierarchy to explain the needs and wants of Asian consumers. a poet must write. But How You Present It Giving a gift in another country requires careful attention if it to be done properly. cunning. and the esteem of others are satisfied. limited to high-income countries. Germans give their automobiles loving care. as countries progress through the stages of economic development. and so on. For example. a simplification of complex human behavior. of course. he or she progresses to higher levels. Arab World Do not give a gift when you first meet someone. 11. the three highest levels emphasize the intricacy and importance of social needs. Bows as we know them are considered unattractive and ribbon colors can have different meanings. security.625. Conformity with group norms becomes a driving force of consumer behavior. 52 Maslow’s Hierarchy of Needs For example. For example. Gifts should be presented privately. it is difficult for the inexperienced or untrained outsider to fathom. safety. Indeed. with the exception of collective ceremonial gifts at banquets. both are associated with the Catholic Lenten season. even numbers. For example. two higher needs become dominant. Affiliation needs are satisfied when an individual in Asia has been accepted by a group. one of the richest countries in the world.It’s Not The Gift That Counts. and social needs. a person from a culture that encourages responsibility and initiative could experience misunderstandings with a client or boss from a culture that encourages bosses to remain in personal control of all activities. Maslow developed an extremely useful theory of human motivation that helps explain cultural universals. Maslow’s Hierarchy of Needs The late A. for example. Such a boss would expect to be kept advised of a subordinate’s actions. Do not risk the impression of bribery by spending too much on a gift. Avoid ribbons and bows as part of gift-wrapping. First is a need for esteem. the subordinate might be taking initiative on the mistaken assumption that the boss would appreciate a willingness to assume responsibility. there is a long tradition of the pursuit of consciousness or self-actualization as a first rather than a final goal in life. For example. Failure to do so will hinder accurate understanding of the meaning and significance of the statements and behaviours of business associates from a different culture. Do not offer a gift depicting a fox or badger. It looks bad unless you know the person well. Because culture is learned behaviour passed on from generation to generation. This is the desire for self-respect. safety. A musician must make music. It appears that selfactualization needs begin to affect consumer behavior as well. The automobile is not quite the classic American status symbol it once was. Once physiological. Do not let it appear that you contrived to present the gift when the recipient is alone. a builder must build. It may be interpreted as a bribe. and the esteem of others and is a power-ful drive creating demand for status-improving goods. The final stage in the need hierarchy is self-actualization. even going so far as to travel to distant locations on weekends to wash their cars in pure spring water. Give the gift in front of others in less personal relationships. the high incidence of violence in the United States may leave Americans with a lower level of satisfaction of this need than in many so-called “poor” countries. having satisfied physiological. H. not in the course of business. Nevertheless. the automobile remains a supreme status symbol. an artist must create.

A useful approach is to view products on a continuum of environment sensitivity. In part. traits. At the upper right of the figure are products with high environmental sensitivity. Support for Schutte’s contention that status is the highest-ranking need in the Asian hierarchy can be seen in the geographic breakdown of the $35 billion global luxury goods market. HIGH FOOD INTERNATIONAL MARKETING Maslow’s Hierarchy: The Asian Equivalent The Self-refernce Criterion And Perception As we have shown. Knowing this. others prefer a darker chocolate while other countries in the Tropics have to adjust the formula for their chocolate products to with stand high temperatures. the vertical axis the degree for product adaptation needed. Step 1: Define the problem or goal in terms of home-country cultural traits. social and cultural environmental conditions. technological. Fully 20 percent of industry sales are to Japan alone. Step 3: Isolate the SRC influence and examine it carefully to see how it complicates the problem. or SRC. The SRC can be a powerfully negative force in global business and forgetting to check for it can lead to misunderstanding and failure. The consumers in some countries prefer a milk chocolate. for example-belongs in the lower left of the figure. the ability to see what is so in a culture. To address this problem and eliminate or reduce cultural myopia. falls into the category because it is sensitive to climate and culture. At the top of the Asian hierarchy is status. a person’s perception of market needs is framed by his or her own cultural experience. every teenager who wanted to fit in bought one (or more). Make no value judgments. however must be modified for various differences in taste and climate. Japanese companies develop local products specifically designed to appeal to teens. Step 4: Redefine the problem without the SRC influence and solve for the host-country market situation. The next level is admiration. Intel was sold over 100 million microprocessors. Nearly half of all sales revenues of Italy’s Gucci Group are generated in Asia. A company with environmentally insensitive products will spend relatively less time determining the specific and unique conditions of local markets because the product is basically universal.625. Moving to the right on the horizontal axis. At the other end of the continuum are products that are highly sensitive to different environmental factors. habits and norms. At one end of the continuum are environmentally insensitive products that do not require significant adaptation to the environments of various world markets. habits and norms. regulatory. Avoiding the SRC requires a person to suspend assumptions based on prior experience and success and be prepared to acquire new knowledge about human behaviour and motivation. chairman Michael Eisner and other company executives were PRODUCT ADAPTATION COMPUTERS LOW INTEGRATED CIRCUITS LOW HIGH Environmental Sensitivity 11. Computers are characterized by low levels of environmental sensitivity but variations in country voltage requirements require some adaptation. A framework for systematically reducing perceptual blockage and distortion was developed by James Lee. with another 22 percent of sales occurring in the rest of the Asia-Pacific region.2 © Copy Right: Rai University 53 . a phrase that describes consumers who engage in conspicuous consumption and buy products and brands that others will notice. it is critical to the global marketer because of the widespread tendency toward ethnocentrism and use of the selfreference criterion. Lee termed the unconscious reference to one’s own cultural values the self-reference criterion. The horizontal axis shows environmental sensitivity. Particular food items such as chocolate. as does the amount of adaptation. Step 2: Define the problem or goal in terms of the host culture. Food. In addition. Although this skill is as valuable at home as it is abroad. McDonald’s has achieved great success outside the United States by adapting its menu items to local tastes. he proposed a systematic four-step framework. because a chip is a chip anywhere around the world. The greater a product’s environmental sensitivity. the greater the need for managers to address country-specific economic. However. the quest for status also leads to luxury badging. attainment of high status is character driven. critical skill of the global marketer is unbiased perception.when Tamagotchis and other brands of electronic pets were the “in” toy in Japan. Any product exhibiting low levels of environmental sensitivity-highly technical products. STATUS ADMIRATION AFFILIATION SAFETY PHYSIOLOGICAL blindsided by a lethal combination of their own prior success and ethnocentrism. the computer’s software documentation should be in the local language. The lesson that SRC teaches is that a vital. a higher-level need that can be satisfied through acts within a group that command respect. the esteem of society as a whole. The sensitivity of products can be represented on a twodimensional scale as shown in the figure. While planning Euro Disney. the level of sensitivity increases. Environmental Sensitivity Environmental Sensitivity is the extent to which products must be adapted to the culture-specific needs of different national markets. especially food consumed in the home.

Food preparation methods are also dictated by culture preferences. The words and their meanings. the message cannot be understood without its context. Italy. Not only does culture influence what is to be consumed. and the Iraqis eat dried. Other cultures are relatively polychronic in the sense that people work on several fronts simultaneously instead of pursuing a single task. In Japan. In such cultures. Switzerland and Scandinavian countries) are examples of lowcontext cultures. a habit shared by some strict Protestants. linear fashion and are thus monochromic in nature. Although the Germans. messages are explicit and clear in the sense that actual words are used to convey the main part of information in communication. The context of communication is high because it includes a great deal of additional information. can be separated from the context in which they occur.e. Japan. Not surprisingly. Influence of Culture on Communication Processes A country may be classified as either a high-context culture or a low-context culture. They also do not smoke or use alcoholic beverages. Muslims do not purchase chickens unless they have been halalled. and like Jews. The consumption of beef provides a good illustration. One’s individual environment(i. This classification provides an understanding of various cultural orientations and explains how communication is conveyed and perceived. salted locusts as snacks while drinking. and expressive manner in which the message is delivered becomes critical. and associations in the society. position. making it possible for businesspersons to come to terms without detailed legal paperwork. or bee spit) and blue cheese or Roquefort salad dressing. Moussy. words) does not carry most of the information. Although these restrictions exist in Islamic countries. but it also affects what should not be purchased. consumption habits vary greatly. thus helping to provide foods such as rice and vegetables. Schedules. living styles. No society has a monopoly on unusual eating habits when comparisons are made among various societies. is a product that was seen as being able to overcome the religious restriction of consuming alcoholic beverages. The eating habits of many people seem exotic to Americans. punctuality. It is thus important for the traveler to recognize how perception of overseas events can be distorted by the effects of the SRC. still a very small amount when compared to the more than 100 pounds consumed per capita in the United States and Argentina. are high-context culture. Culture prescribes the manner in which people satisfy their desires. Furthermore. no consumption of pork is allowed. Asian consumers prefer their chicken broiled or boiled rather than fried. such as the message sender’s values. believing that it is improper to eat cattle that work on farms. The context of a culture is either high or 54 © Copy Right: Rai University 11. By conforming to the religious beliefs of Islam. This phenomenon is known as the self-reference criterion. France. which is made with a strong cheese with bluish mold. the communication may be indirect. The French eat snails. consumption habits in the West are just as strange to foreigners. Although such eating habits may seem repulsive to Americans and Europeans. then. The Chinese eat such things as fish stomachs and bird’s nest soup(made from bird’s saliva). and a sense that time forms a purposeful straight line are indicators of such cultures. being independent entities. thinking processes are also affected y culture. not how it is said and not the environment within which it is said. physical setting and social circumstances) determines what one says and how one is interpreted by others. Consequently. the situation is not entirely without market possibilities. Americans and Europeans use honey (bee expectorate. Because of the effect of the SRC. the individual tends to be bound by his or her own cultural assumptions. In these types of society. For them it is premature to discuss business matters seriously without first establishing a personal relationship. the Chinese in Hong Kong found American-style fried chicken foreign and distasteful. Africa and the Middle Eastern Arab nations in contrast. low in terms of in-depth background information. is a matter of degree. Because the verbal part(i.Influence of Culture on Consumption Consumption patterns. Being monochromic. and the priority of needs are all dictated by culture. is what is said. The Japanese are often misunderstood and accused by Westerners of not volunteering detailed information. The marketing challenge is to create a product that fits the needs of a particular culture. back to personal cultural values. INTERNATIONAL MARKETING Influence of Culture on Thinking Processes In addition to consumption habits. Both Japanese and Hispanic cultures are good examples of a polychronic culture. Some cultures handle information in a direct. What is important. Asia. Some Thai and Chinese do not consume beef at all. When traveling overseas. This type of communication emphasizes one’s character and words as determinants of one’s integrity. much of the information is contained in the non verbal part of the message to be communicated. perhaps unconsciously. the Americans are generally more monochromic than most other societies.e.625. The Japanese eat uncooked seafood. the per capita annual consumption of beef has increased to eleven pounds. Swiss and Americans are all monochromic cultures. whereas the Japanese do not want to look each other in the eye because eye contact is an act of confrontation and aggression. however.2 . The Japanese are also not comfortable in getting right down to substantive business without first becoming familiar with the other business party. American businesspersons consider the failure of the Japanese to make eye contact as a sign of rudeness. As such. background.g. Spain. North America and northern Europe(e. and their fast tempo and demand for instant responses are often viewed as pushy and impatient. Moussy has become so successful in Saudi Arabia that half of its worldwide sales are accounted for in that country. Germany. it is virtually impossible for a person to observe foreign cultures without making references. The truth of the matter is that the Japanese do not want to be too direct because by saying things directly they may be perceived as being insensitive and offensive. a nonalcoholic beer from Switzerland. Cultures also vary in the manner by which information processing occurs.

is a polychronic and high context culture. Thus. but people who presumably speak the same language may also encounter serious communication problems. In order to understand these diverse groups of consumers. cohesive groups. Cultures with high PDI 55 11. Neither does it exist in the United States. and western consumers. However. Although race or ethnic origin is one obvious way. Spanish language advertising positively affected Hispanic consumers in the United States by signaling solidarity with the Hispanic community. power inequality between superiors and subordinates within a social system. but rather that personal initiative is accepted and endorsed. Canada. farmer. 2.625. among other numerous groups. worldwide consumer homogeneity does not exist.The cultural context and the manner in which the processing of information occurs can be combined to develop a more precise description of how communication takes place in a particular country. though much smaller than that of Japan. young. language choice requires more research. The need to work hard together was initially fostered by the need to repair the economy after World War II. in comparison. This does not mean that individuals fail to identify with groups when a culture scores high on IDV. subcultures are groups of people within a larger society. The Individualism/Collective Index(IDV). truckdriver. ethnic differences are clearly visible to anyone who travels across Canada. Furthermore. Individualism pertains to societies in which the ties between individuals are loose. Although some found. with lifestyles and cultures that seem thousands of years apart. and the lessons learned from this experience have not been forgotten.2 © Copy Right: Rai University . a marketing question is the language that should be used so as to effectively appeal to a particular subculture. As the focus is on a subgroup within a society. is much more geographically dispersed. exclusive use of Spanish in advertising also had a negative effect since it appeared to arouse Hispanic insecurities about language usage. each having its own unique characteristics. Research evidence indicates that the four cultural dimensions can be used to classify countries into groups that will respond in a similar way in business and market contexts. that is. The Uncertainty Avoidance Index(UAI). The Power Distance Index(PDI). National pride and management philosophy also help to forge a high degree of unity. Indonesia.000 people in 66 countries. INTERNATIONAL MARKETING Subculture Because of differing cultures. Hofstede’s approach has been widely and successfully applied to international marketing and research by others has reaffirmed these linkages. which focuses on self-orientation. the society as a whole is remarkably homogenous. eastern. they also preserve their own customs and lifestyles. It is a small country in terms of area. According to one study. everyone is expected to look after himself or herself and his or her immediate family. Individualism/Collective Index(IDV) The Individualism/Collective Index refers to the preference of behaviour that promotes one’ self-interest. Its population. which throughout people’s lifetime continue to protect them in exchange for unquestioning loyalty. Given the fact that each subcultural group is a part of the larger culture while possessing its own unique cultural. in contrast. The degree of intracountry homogeneity varies from one country to another. Germany. and regional differences exist among the provinces. Differences in consumer groups are everywhere. demographic. Power Distance Index(PDI) The power distance index measures the tolerance of social inequality. making them significantly different from other groups within the larger culture of which they are a part. is a monochromic and low context culture. Catholic. has more than 300 ethnic groups. As a result. which focuses on achievement orientation. Culture Values Underlying the cultural diversity that exists among countries are fundamental differences in cultural values. 3. for instance. Or a low context German becomes upset when he feels that he does not get enough details from the high context Frenchman. The Masculinity/Femininity Index(MAS). Studying over 90. Subgroups within societies utilize specialized vocabularies. France. A subculture is a distinct and identifiable cultural group that has values in common with the overall society but also has certain characteristics that are unique to itself. Communication problems between speakers of different languages are apparent to all. old. particular cultures must be examined. Although the various subcultures share some basic traits of the wider culture. black. he found that the cultures of the nations studied differed along four primary dimensions and that various business and consumer behaviour patterns can be closely linked to these four primary dimensions. and consumption characteristics. Therefore. Other demographic and social variables can be just as suitable for establishing subcultures within a nation. The most useful information on how cultural values influence various types of business and market behaviour comes from a seminal work by Geert Hofstede. people work hard together harmoniously to achieve the same common goals. culture on a smaller and more specific level. while those low in individualism reflect a “we” mentality and generally subjugate the individual to the group. 4. Collectivism as its opposite pertains to societies in which people from birth onward are integrated into strong. which focuses on authority orientation. the differentials are not pronounced. the more appropriate area for investigation is not culture itself but rather subculture. A low context German may insult a high context French counterpart by giving too much information about what is already known. There are white. is a large country in terms of geography. There are many different ways to classify subcultures. which focuses on risk orientation. making its population geographically concentrated. it is not the only one. for example. Cultures that are high in IDV reflect an “I”mentality and tend to reward and accept individual initiative. The four dimensions are: 1. There are several reasons why Japan is a relatively homogenous country. In the case of Japan. Jewish.

while others make sharp divisions between what men should do and what women should do. those cultures low in UAI take a more empirical approach to understanding and knowledge while those high in UAI seek a more “absolute truth”. a tolerance of deviance and dissent. manipulation and inheritance as sources of power. on the other hand. Some cultures allow men and women to take on many different roles. Cultures with high UAI scores are highly intolerant of ambiguity. interdependence. Those with very high level of UAI thus accord a high level of authority to rules as a means of avoiding risk. with members citing force.625. INTERNATIONAL MARKETING 56 © Copy Right: Rai University 11. Thus. assertive roles and women more service-oriented. Assertiveness. A low score reflects the opposite attitude. and people. Low-scoring cultures are associated with fluid sex roles. Thus.scores tend to be hierarchical. caring roles. An interesting study showed that tipping appeared to be less prevalent in countries with feminine values (low MAS scores) that emphasized social relationships compared with countries with masculine values (high MAS scores) that emphasized achievement and economic relationships. They tend to have a high level of anxiety and stress and a concern with security and rule following. Those with low scores. High power scores tend to indicate a perception of differences between superior and subordinate and a belief that those who hold power are entitled to privileges. Uncertainty Avoidance Index(UAI) The uncertainty avoidance index explains the intolerance of ambiguity and uncertainty among members of a society. and a willingness to take risks. Accordingly. which in the extreme become inviolable rules. equality between the sexes. the acquisition of money and not caring for others. they dogmatically stick to historically tested patterns of behaviour.2 . men are supposed to have dominant. and as a result tend to be distrustful of new ideas or behaviours. cultures with high PDI scores are more apt to have a general distrust of others since power is seen to rest with individuals and is coercive rather than legitimate. tend to value equality and cite knowledge and respect as sources of power. In societies that make a sharp division. and the extent to which the dominant values in society are “masculine”. Masculinity/Femininity (MAS) The masculinity/femininity index refers to one’s desire for achievement and entrepreneurial tendencies. and the quality of life or people are all cultural traits in countries with high MAS scores. Cultures scoring low in uncertainty avoidance are associated with a low level of anxiety and stress. and an emphasis on service.

Some businesses plot their strategies with the idea that counterparts of other business cultures are similar to their own and are moved by similar interests. Knowledge of the business culture. do not be offended by the Brazilian inclination to touch during conversation. that is. ultimately. (8) liking for others. One report notes that Japanese culture.” However. “They border on the 12 Boy Scout laws. there are ten basic criteria that all who wish to deal with individuals. (7) knowledge of the country. as we complete this chapter we see that it is the obvious that we sometimes overlook. More than tolerance of an alien culture is required. the small. (4) justice/fairness. political and family ties. and family loyalty. Besides an analysis of the need for adaptation. and central and southern Europeans as elitists and rank conscious. In such situations. from reaching satisfactory conclusions to business transactions. religious practices. or religious backgrounds. is required on small matters as well as large ones. If we do not understand our foreign counterpart’s customs. rather. As one critic commented. motivations. As a guide to adaptation. There is a need for affirmative acceptance. is not something apart from business but determines its very essence. permeated by Shinto precepts. Japan’s lack of frontiers and natural resources and its dependence on trade have focused individual and corporate success criteria on uniformity. they are hampered. heritage. failed business opportunities if they are not understood and responded to properly. Japanese as consensus-oriented and committed to the group. and society’s ability to maintain high levels of employment. adaptation becomes easier because empathy for another’s point of view naturally leads to ideas for meeting cultural differences. it will review the structural elements. and business methods existing in a country and a willingness to accommodate the differences are important to success in an international market. (2) flexibility. They are: (1) open tolerance. Required Adaptation Adaptation is a key concept in international marketing and willingness to adapt is a crucial attitude. It is difficult to argue with these ten items. Essential to effective adaptation is awareness of one’s own culture and the recognition that differences in others can cause anxiety. While these descriptions are stereotypical. open tolerance of the concept “different but equal” Through such affirmative acceptance. Executives are to some extent captives of their cultural heritages and cannot totally escape language. if not prevented.625. but it is not unusual to have one negotiator’s business proposition accepted over another’s simply because “that one understands us. their basic frame of references is most likely to be that of their own people. and misunderstanding of the host’s intentions. attitudes. Culture not only establishes the criteria for dayto-day business behavior but also forms general patterns of attitude and motivation. and. concluding with a discussion of ethics and socially responsible decisions. seemingly insignificant situations are often the most crucial. firms. even if asked for. Such a © Copy Right: Rai University 57 . Degree of Adaptation Adaptation does not require business executives to forsake their ways and change to conform to local customs. (9) ability to command respect.” Even though they may be just like us in some respects. it is considered discourteous to use first names unless specifically invited to do so. can cause a host to “lose face. political structure. The feudal background of southern Europe tends to emphasize maintenance of both individual and corporate power and authority while blending those feudal traits with paternalistic ‘concern for minimal welfare for workers and other members of society.” 11. Unless marketers remain flexible in their own attitudes by accepting differences in basic patterns of thinking. the historical perspective of individualism and “winning the West” seems to be manifest in individual wealth or corporate profit being dominant measures of success. management attitudes. miscommunication. In short. The key to adaptation is to remain American but to develop an understanding and willingness to accommodate differences that exist. (5) ability to adjust to varying tempos. A successful marketer knows that in China it is important to make points without winning arguments. subordination to the group. executives must be aware of local customs and be willing to accommodate those differences that can cause misunderstanding. and (10) ability to integrate oneself into the environment. criticism. In Brazil. and behavior of international business processes. A lack of empathy for and knowledge of foreign business practices can create insurmountable barriers to successful business relations. and goals-that they are “just like us. add the quality of adaptability to the qualities of a good executive for a composite of the perfect international marketer.2 This chapter focuses on matters specifically related to the business’-environment. Various studies identify North Americans as individualists. or authorities in foreign countries should be able to meet. (6) curiosity/interest. they illustrate cultural differences that are often manifest in business behavior and practices.” In Germany. local business tempo. always address a person as Hen. for example. The self-reference criterion (SRC) is especially operative in business customs. enough differences exist to cause frustration. Frau. frustration. obstacles take many forms.INTERNATIONAL MARKETING LESSON 9: BUSINESS CUSTOMS IN GLOBAL MARKETING Business customs are as much a cultural element of a society as is the language. we are more likely to evaluate that person’s behavior in terms of what is acceptable to us. or Fraulein with the last name. In fact. (3) humility. In the United States. or at least accommodation. Although international business managers may take on the trappings and appearances of the business behavior of another country. Adaptation.

Successful businesspeople know the Chinese word guan-xi. Once a marketer is aware of the possibility of cultural differences and the probable consequences of failure to adapt or accommodate. open tolerance and a willingness to accommodate each other’s differences are necessary.2 58 © Copy Right: Rai University . and other Asian cultures it is imperative to avoid causing your counterpart to “lose face. Naturally. A complicating factor in cultural awareness is that what may be an imperative to avoid in one culture is an imperative to do in another. or Brazilian. In China. When different cultures meet. and other trusting relationships are developed. Friendship motivates local agents to make more sales and friendship helps establish the right relationship with end users. compadre. with Arab and Latin American executives it is important to make strong eye contact or you run the risk of being seen as evasive and untrustworthy. In those cultures where friendships are a key to success. peculiar to the foreigner) even though locals may. Often. it is probably never acceptable to lose your patience. but in others it could end a business deal.custom is not a violation of your personal space but rather the Brazilian way of greeting. or religious reasons). mores. or compadre has the edge. among themselves. Equally offensive is a foreigner criticizing a country’s politics. human relations. customs in which an outsider must not participate.S Cultural adiaphora are the most visibly different customs and thus more obvious. In the Czech Republic an aperitif or other liqueur offered at the beginning of a business meeting. to shout at a Chinese person in Cultural adiaphora relates to areas of behavior or to customs that cultural aliens may wish to conform to or participate in but that are not required. One need not greet another man with a kiss (a custom in some countries). An international marketer must appreciate the nuances of cultural imperatives. For the most part adiaphora are customs that are optional. Japanese do not expect a Westerner to bow and to understand the ritual of bowing among Japanese. and peculiarities (that is. or drink alcoholic beverages (if for health. the basic cultural prerequisites for developing and retaining effective business relationships.” In China to raise your voice. Establishing friendship is an imperative in many cultures. However. emphasizing a point or as a gesture of goodwill and friendship. the businessperson should not slight the time required for their development. customs to which adaptation is optional.7 Chinese business negotiations often include banquets at which large quantities of alcohol are consumed in an endless series of toasts. price. “I’ll curse my brother but. a symbolic attempt to participate in adiaphora is not only acceptable but also may help to establish rapport. even in the morning. or at taining a level of trust. All refer to friendship. adiaphora. is a way to establish good will and trust. In some cultures such behavior would only cast you as boorish. For example. German. ningen kankei. It is imperative that you participate in the toasts with a raised glass of the offered beverage but to drink is optional. criticize such issues. Cultural Adiaphora INTERNATIONAL MARKETING Cultural imperatives refer to the business customs and expectations that must be met and conformed to or avoided if relationships are to be successful. you should accept even if you only take a ceremonial sip. or correct someone in public however frustrating the situation. yet a symbolic bow indicates interest and some sensitivity to their culture that is acknowledged as a gesture of goodwill. raise your voice. while in other cases the offer of a beverage is a ritual and not to accept is to insult. There is truth in the old adage. and the product must be competitive. and it would be foolish for an American to give up the ways that have contributed so notably to American success. personal. It demonstrates that the marketer has studied the culture. you are not Chinese. a Christian attempting to act like a Muslim would be repugnant to a follower of Mohammed. A Chinese. and cultural exclusives. In some cultures one can accept or tactfully and politely reject an offer of a beverage. ningen kankei. Informal discussions. although adiaphora in one culture may be perceived as imperative in another. or to correct them in front of their peers will cause them to lose face. in Japan prolonged eye contact is considered offensive and it is imperative that it be avoid. among the many obvious differences that exist between cultures. it is not particularly important but permissible to follow the custom in question. They also know there is no substitute for establishing friendship in some cultures before effective business negotiations can begin. It would be equally foolish for others to give up their ways. Cultural Exclusives Cultural exclusives are those customs or behavior patterns reserved exclusively for the locals and from which the foreigner is excluded. It is imperative that you accept unless you make it clear to your Czech counterpart that the refusal is because of health or religion. Japan. cultural adiaphora. Where does one begin? Which customs should be absolutely adhered to? Which others can be ignored? Fortunately. Adiaphora and Exclusives Business customs can be grouped into imperatives. or Brazilian does not expect you to act like one of them. but the marketer who has established guan-xi. entertaining. eat foods that disagree with the digestive system (so long as the refusal is gracious). For example. only a few are troubling. For example. if 11. the Japanese ningen kankei. mutual friends. contacts. but American. and exclusives. leading to more sales over a longer period. In some cultures a person’s demeanor is more critical than in other cultures. It may help pave the way to a strong.3 If friendship is not established. the marketer risks not earning trust and acceptance. The majority of customs fit into this category. German. customs that must be recognized and accommodated. It is a sign that you are being welcomed as a friend.625. the seemingly endless variety of customs must be assessed. On the other hand. it is compliance with the less obvious imperatives and exclusives that is more critical. Cultural Imperatives public. after-sales service. in other words. or the Latin American compadre. trusting relationship. Imperatives. After all. and just spending time with others are ways guan-xi. Your Arab business associates will offer coffee as part of the important ritual of establishing a level of friendship and trust.

management attitudes. My first running course was from the Palace of Fine Arts to the Majestic Hotel where my family and I were staying. Top-level management decision making is generally found in those situations where family or close ownership gives absolute control to owners and where businesses are small enough to make such centralized decision making possible.”1 began my speech with a joke that took me about. communications emphasis.” he said. “but at the end. decision-making authority is guarded jealously by a few at the top who exercise tight control. and behaviors encountered in international business. such as Mexico and Venezuela. Pincer : Clamped between the thumb and index finger. who generally lack any working knowledge about management. just to make sure. and we both run several kilometers every day. and cultural values that determine the prominence of status and position (PDI) combine to influence the authority structure of business. tempo. One speaker.appropriateness of the remark. or an exclusive and have the adaptability to respond to each. rely on good manners and respect for those with whom you are associating. such as in France.S. In fact. or even scorn. I continued with my talk which seemed’ well received. audience laughed loudly. It is not necessary to obsess over committing a faux pas. you’ll have a fight. I did not understand it. newspapers commented on the in. the top man makes all decisions and prefers to deal only with other executives with decision-making powers.2 © Copy Right: Rai University 59 . as will the negotiation emphasis. public accountability. a certain amount of cultural shock occurs when differences in contact level. Decision-making participation by middle management tends to be de-emphasized. In high PDI countries like Mexico and Malaysia. In most countries. Foreign managers need to be perceptive enough to know when they are dealing with an imperative. but most offensive behavior results from not recognizing them. I first acquired my habit of running here in Mexico City. is the executive’s trademark. Most sensible businesspeople will make allowances for the occasional misstep. There. In Middle Eastern countries. dominant family members make decisions that tend to please the family members more than to increase productivity. About thirty second later the Japanese. Carter said.625. encounter a fairly high degree of government involvement. This is also true for government-owned companies where professional managers have to follow decisions made by politicians. ‘How did you translate my joke so quickly?’ The interpreter replied. in describing his experience. Pointer : Offered with the index finger pressed along the edge. most are a variation of three typical patterns: top-level management decisions. There are a variety of ways to present a card. depending on the giver’s personality and style: Crab style : Held out between the index and middle fingers. where a semi-feudal. one always does business with an individual per se rather than an office or title. In response to a comment by President Portillo. understanding the rank and status of clients and business partners is muchmore important than in more egalitarian (low PDI) societies like Denmark and Israel. I asked the. land-equals-power heritage exists. No matter how many times you have talked with a businessperson by phone before you actually meet. symbolizes embarrassment. business cannot really begin until you formally exchange cards. In many European businesses. Here are examples: President Jimmy Carter was in Mexico to build bridges and mend fences. more often than not. For a businessperson to make a call or re-ceive a visitor without and is like a Samurai going off to battle without his sword. In high PDI countries subordinates are not likely to contradict bosses. Then my interpreter translated my story. In the midst of the Folklorico performance) I discovered that I was afflicted with Montezuma’s Re-venge. 4 billion annually. the foreign trader is also likely to 11. INTERNATIONAL MARKETING Crossing Borders 1 Jokes Don’t Travel Well Cross-cultural humor has its pitfalls.you curse him. Hold your humor until you are comfortable with the culture. ‘Oh I did not translate your story at all. ownership. Sometimes a Mot oe. It is both a mini re-sume and a friendly deity that draws people together. Among the four dimensions of Hofstede’s cultural values discussed in Chapter 4 Individualism/Collectivism (IDV) and Power Distance (PDI) are especially relevant in examining methods of doing business among countries. but in low PDI countries they often do. “ Who can say with certainty that anything is funny? Laughter. nervousness. but a foreigner must carefully refrain from participating in those that are reserved. translator can help you out. Humor is culturally specific and thus rooted in people’s shared experiences. an adiaphora. I simply said our foreign speaker has just told a joke so would you all please laugh. Ethical standards are likely to differ. But the fewer you make the smoother the relationship will be. There are not many imperatives or exclusives. decentralized decisions. In other countries. or Meishi. interpreter. The value of a Meishi cannot be overemphasized. What is funny to you may not be funny to others. said. up to 12 million are exchanged daily and a staggering’4. “We both have beautiful and interesting wives. Among Americans this may have been an amusing comment but it was not funny to the Mexican. two minutes to tell. Crossing Borders 2 Meishi— Presenting Business Card in Japan In Japan the business card. When in doubt. vn huh el nedd e. Although the international businessperson is confronted with a variety of authority patterns.” There are few cultural traits reserved exclusively for locals. Upside down : The name is facing away from the recipient Methods of Doing Business Because of the diverse structures. Sources and Level of Authority Business size. Editorials in Mexico and U. and formality of foreign businesses are encountered. and committee or group decisions. No matter how thoroughly prepared a marketer may be when approaching a foreign market. On live television President Carter and President Jose Lopez Portillo were giving speeches. management styles are characterized as autocratic and paternalistic. ‘ s jks ee tog wl itndon’t translate well. there is considerable latitude in ways business is conducted.

In the case of the authoritative and delegated societies. A trader in the United States is likely to be dealing with middle management. Despite the emphasis on rank and hierarchy in Japanese social structure. and group decision making-but at top management level. In European companies. Committee decision making is by group or consensus. two golden Arches outlets in Mexico City papered their trays with placemats embossed with a representation of the national emblem. This is typical of large-scale businesses with highly developed management systems such as those found in the United States. a good personal life takes priority over profit. Decentralized decision making allows executives at different levels of management authority over their own functions. sound company policies. It was to help Mexicans learn about their culture. The word security is somewhat ambiguous and this very ambiguity provides some clues to managerial variation. Do not put the card away before reading or your will insult the other person. In the committee decision setup. so it is hard to generalize to the extent of saying that managers in anyone country always have a specific orientation. To some. the site of the Aztec city of tenochtitlan. Not only is there a way to present a card. It makes a good impression to receive a card in both hands. In his worldwide study of 11. but the concept of committee management implies something quite different from the individualized functioning of the top management and decentralized decision-making arrangements just discussed. For example. and write on a person’s card in their presence as this may cause offenses. Security and Mobility Crossing Borders 3 The Engle : An Exclusive in Mexico According to legend. it means the security of lifetime positions with their companies.e.625. In McDonalds’s case there is no question that the use of the eagle was considered among. and conducting business with foreigners. As businesses grow and professional management develops. there is also a way of received a car. cultural environment) of managers significantly affect their personal and business outlooks. we emphasize profit or high wages while in other countries security. To fully understand another’s management style. there is a shift toward decentralized management decision making. security means good wages and the training and ability required for moving from company to company within the business hierarchy. Individual goals are highly personal in any country. one must appreciate an individual’s objectives and aspirations that are usually reflected in the goals of the business organization and in the practices that prevail within the company. A senior Personal security and job mobility relate directly to basic human motivation and therefore have widespread economic and social implications. or power may be emphasized. security. Because Asian cultures and religions tend to emphasize harmony and collectivism. for others. Swedish managers were found to express little reluctance in bypassing the hierarchical line. was revealed to its founders by an eagle bearing a snake in its claws and alighting on a cactus. The marketing approach to each of these situations differs. Society as a whole establishes the social rank or status of management. new products. or any other goal. This image is now the official seal of the country and appears on its flag.. to still others. partner in McDonald’s of Mexico explained. whereas French managers place great importance on competent supervision. and cultural background dictates patterns of aspirations and objectives among businesspeople. Personal Goals In the United States. To commemorate Mexico’s Flag Day. so the Japanese recipient will be able to determine your position and rank and know how to respond to you. there is a strong paternalistic orientation. Committees may operate on a centralized or decentralized basis. acceptance. studies have shown that Kuwaiti managers are more likely than American managers to make business decisions consistent with their own personal goals. the chief problem would be to identify the individual with authority. Personal Life For many individuals. it is necessary that every committee member be convinced of the merits of the proposition or product in question.2 60 © Copy Right: Rai University . Management Objectives and Aspirations The training and background (i. security. and title or position generally takes precedence over the individual holding the job. The normal procedure is for the Japanese to hand you their name card and accept yours at the same time. There is much less mobility among French managers than British. now Mexico city. The demands of these three types of authority systems on a marketer’s ingenuity and adaptability are evident. The card should be presented during the earliest stages of introduction. while Italian managers believed that bypassing the hierarchical line was a serious offense. in Britain managers place great importance on individual achievement and autonomy. In dealing with foreign business. good personal life.INTERNATIONAL MARKETING Platter fashion : Served in the palm of the hand. and it is assumed that individuals will work for one company for the majority of their lives. particularly in the countries late in industrializing such as France and Italy. advancement. a marketer must be particularly aware of the varying objectives and aspirations of management. group harmony. Eagle eyed government agents swooped down and confiscated the disrespectful placemats. “Our intention was never to give offense. Thus. it means adequate retirement plans and other welfare benefits. it is not surprising that group decision-making predominates there. business emphasizes group participation. especially when the other party is senior in age or status. status. “ It is not always clear what symbols or what behavior patterns in a country are reserved exclusively for locals. They read your card and then formally greet you either by bowing of shaking hands or both. For example. These cultural influences affect the attitude of managers toward innovation. and comfortable working conditions. Mexican authorities were furious to discover their beloved eagle splattered with catsup by an interloper from north of the border: McDonald’s. Mexicans as an exclusive for Mexicans only. fringe benefits.

If you don’t speak French fluently. the Japanese language is so inherently vague that even the well educated have difficulty communicating clearly among them-selves. managers. but much business communication depends on implicit messages that are not verbalized. E. The Brits were just exploring the terrain.625. Linguistic communication. he generally answers by telling you he works for Sumitomo or Mitsubishi or Matsushita. not! There is always the issue of language and meaning even when you both speak English. The Spaniard will loosen his tie. When first meeting with a French speaking business person. An American will beam with pleasure. “It’s a great idea. Communications Emphasis Probably no language readily translates into another because the meanings of words differ widely among languages. particularly from the United States. misunderstandings occur. turned to the Chinese official and said. The Asian outlook is reflected in the group decision-making so important in Japan. “And now the American has made a proposal regarding the automobile industry”. Even though it is the basic communication tool of marketers trading in foreign lands. Li. The anecdote you open a meeting with may fly well with your American audience. So does the Italian. the French will smile the Belgians will laugh. “In some cultures. The best policy when dealing in other languages. even with a skilled interpreter. but who’s going to put wheels on it?” The interpreter. no matter how imprecise. they mean to get down to business. T. the American answered affirmatively to a Chinese proposal with.2 © Copy Right: Rai University 61 . The Brit and the Dutchman will take off their jackets and literally roll up their sleeves. Foreign language skills are critical in all negotiations. often fail to develop even a basic understanding of a foreign language.” The Japanese work ethic maintenance of a sense of purpose-derives from company loyalty and frequently results in the Japanese employee maintaining identity with the corporation. Mr. Madame. 11. With all that. Group identification is so strong in Japan that when a worker is asked what he does for a living. The French were assessing the other payers’ strength and weaknesses and deciding what position to take at the next meting. an engineer. power-seems to be a more important motivating force in South American countries. much less master the linguistic nuances that reveal unspoken attitudes and information. The Japanese often prefer English-language contracts where words have specific meanings. Such apology shows general respect for the language and dismisses any stigma of American arrogance. professor of anthropology and. checking out the broad perimeters and all that. or a chemist. acceptance by neighbors and fellow workers appears to be a predominant goal within business. In fact. While the German disapproves – he thinks they look sloppy and un-business like and he keeps his coat on throughout the meeting. The translation and interpretation of clearly worded statements and common usage is difficult enough. the entire conversation was disrupted by a misunderstanding of a slang expression. and the Germans will take you literally. Humor doesn’t travel well. especially in translations involving Asian languages. The hedonistic outlook of ancient Greece explicitly included work as an undesirable factor that got in the way of the search for pleasure or a good personal life. is to stick to formal language patterns. but when slang is added the task is almost impossible. personal life is company life. Stick with monsieur. In some countries. A brat will ask you what was working with it your have just told him politely that he barely scraped by. did the meeting decide anything? It was. If you tell someone his presentation was “quite good”. after all a first meeting. And then there are the French. many business leaders are not only profit-oriented but also use their business positions to become social and political leaders. Social Acceptance INTERNATIONAL MARKETING The formality of dress can vary with each county also. apologize. for decades. In an exchange between an American and a Chinese official. yes! For cultural differences. English and American English are often miles apart. A communications authority on the Japanese language estimates that the Japanese are able to fully understand each other only about 85 percent of the time. such workers may even find themselves “working in a dream. The Italian also won’t have taken it too seriously. however. the Dutch will be Puzzled. Only the Germans will have assumed it was what it seemed and be surprised when the next meeting starts open ended. David McClelland discovered that the culture of some countries stressed the virtue of a good personal life as being far more important than profit or achievement. consultant to business and government on intercultural relations. and the Japanese place high importance on fitting in with their group. Power Although there is some power-seeking by business managers throughout the world. Many Japanese workers regard their work as the most important part of their overall lives. so it is imperative to seek the best possible personnel. To the Japanese. One writer comments “even a good interpreter doesn’t solve the language problem. says.” Seemingly similar business terms in English and Japanese often have different meanings.individual aspirations. Perhaps at least part of the standard of living that we enjoy in the United States today can be attributed to the hardworking Protestant ethic from which we derive much of our business heritage. Who are very attentive to hierarchy and ceremony. but that was because he dressed especially for the look of the meeting. the words carry most of the information. or mademoiselle. does it mean that all differences have been wiped away? For some of the legal differences. not wanting to lose face but not understanding. Hall. Even then. is explicit. In these countries. For them it was a meeting to arrange the meeting agenda for the real meeting. Then there is the matter of humor. The use of slang phrases puts the interpreter in the uncomfortable position of guessing at meanings. Metaphorically speaking. Crossing Borders 4 Business : Protocol in a Unified Europe Now that 1992 has come and gone and the European community is now a single market. the use of first names is disrespectful to the French. rather than that he is a chauffeur. messages are explicit.

and who is making the comment are all . the French are dubbed snobbish by Americans. low context American culture scores relatively low on power distance and –high on individuaIisnr. Comparing British and American business managers. A psychologist at the university of Chicago discovered that the pupil is a very sensitive indicator of how people responds to a situation. In a high-context culture it takes considerably longer to conduct business because of the need to know more about a businessperson before a relationship develops. Haste and impatience are probably the most common mistakes of North Americans attempting to trade in the Middle East. whereas the low-context culture depends more on explicit. “At a cocktail party or a dinner.important in modifying meaning. Communication in a high-context culture depends heavily on the context or nonverbal aspects of communication. When you are interested in some thing. nowhere is it found more offensive than in France. verbally expressed Communications. listener often does not get the point at all. and other written communications. or “we will consider” might really mean “we will. frequently we don’t even know what we know. Thus. our communication is heavily dependent on our cultural context. contracts. not to look at the eyes that carefully. unfortunately. negotiations are likely to be © Copy Right: Rai University 11. Those who work side by side for years still address one another with formal pronouns.” where formality still reigns. that one of the reasons why they use a close conversations distance than Americans do. an English executive commented about the American manager’s compelling involvement in business. .” Even though Northern Europeans seem to have picked up some American attitudes in recent years. You can ask about the family or ask.” In China.2 . “While using first names in business encounters is regarded as an American vice in many countries. If you don’t. But if your use an Arab distance. “I agree.” might mean “I agree with 15 percent of what you say”. It also may mean that we are not totally tuned in to the situation. even indoors. This apparent informality.” Even in low-context cultures. you can watch the pupil of the eye. By watching the pupils. a common trait among Chinese. For-example. as Hall suggests. . does not indicate a lack of commitment to the job. is not only the mastery of a language but also a mastery of customs and culture. the American is still on duty. you have a problem.S. if your hear something your don’t like. You must learn to wait and not be too eager to talk business. France ranks fairly high on the power distance value orientation (PDI) scale while the United States ranks much lower. the Arabs have known about the pupil response for hundreds if not thousand s of years. May be we should all wear dark glasses. while the French consider Americans Philistines. about two feet. we have a hard time following. It is not enough to master the basic language of a country. Managers in general probably function best at a low context level because they are accustomed to reports.context:Arab-cultures-scoreirigh-on:power distance and low on individualism. which the researcher describes as “somewhere between verbal and nonverbal communications. the context within which a statement is made.In other cultures . they can respond rapidly to mood changes. “in the Middle East. the U. and. Formality and Tempo The breezy informality and haste that seem to characterize the American business relationship appear to be American exclusives that businesspeople from other countries not only fail to share but also fail to appreciate. and such differences can lead to cultural misunderstandings. Communication mastery. Most of us are not aware of how dependent we are on the context. ‘How are you feeling?’ but avoid too many personal questions about wives because people are apt to get suspicious. comments such as. If you stare at some one.” Hall divides cultures into high-context and low-context cultures. At about five feet. do not count on them being “Americanized. High-context businesspeople simply do not know how to handle a lowcontext relationship with other people. Prior experience. 62 INTERNATIONAL MARKETING Crossing Borders 5 You Don’t Have to be a Hollywood Star to Wear Dark Glasses Arabs may watch the pupils of your eyes to judge your responses to different topics. “ As an example of this phenomenon. one study discusses hinting. These are people reading the personal interaction on a second to second basis. if you aren’t willing to take the time to sit down and have coffee with people. Probably every businessperson from America or other relatively low-context countries who has had dealings with counterparts in high-context countries can tell stories about the confusion on both sides because of the different perceptual frameworks of the communication process.625. It’s a little bit like a courtship. For example. Such mastery develops only through long association. eye movement. Direct eye contact for an American is difficult to achieve because we are taught in the United States not to star. it is too intense. “we might be able to” could mean “not a chance”. many Arabs wear dark glasses. however. and because people can’t controls the response of their eyes. you can’t go to the next step. Hall suggests that. too sexy. the-formalities-of-French-business practices as opposed to Americans’ casual manners are symbols of the French need to show rank and Americans’ tendency to downplay it. Learn to make what we call chitchat. Recent studies have identified’ a strong relationship between Hall’s high/low context and Hofstede’s individualism/ collectivism (IDY) and power distance (PDI) indices. less information is contained in the verbal part of the message since more is in the context. but the real decision maker will not. or too hostile. The Chinese speaker often feels that such statements are very blunt with a clear hint.” As one writer says. then. your pupils dilate. the astute marketer must have a mastery over the language of business and the silent languages of nuance and implication. “Since much of our culture operates outside our awareness. your eyes tend to contract. In a low-context culture one-gets down to business quickly.-whilehigh. the normal distance between two Americans who are talking. Most Arabs do not like to embark on serious business discussions until after two or three opportunities to meet the individual they are dealing with.

The term means mental deficient in Britain. A closet usually refers to the W. manana (tomorrow) is good enough. or monochromic time. Often INTERNATIONAL MARKETING Crossing Borders 6 You Say You Speak English? The English speak English and North Americans speak English. Most cultures offer a mix of P-time and M-time behavior.S. To ring someone up is to telephone them. you mean you want to discuss it. and were more likely to blame external factors for their lateness than were Americans. One study comparing perceptions of punctuality in the United States and Brazil found that Brazilian timepieces were less reliable and public clocks less available than in the United States. to get down to business. You will be putting your clothes not in a closet. is more dominant in high-context cultures where the completion of a human transaction is emphasized more than holding to schedules.” P-time allows for relationships to build and context to be absorbed as parts of high-context cultures. and Scandinavians. while the first floor is what we call the second. The American desire to get straight to the point. but have a tendency to be either more P-time or M-time in regard to the role time plays. two Latins conversing would likely opt to be late for their next appointments rather than abruptly terminate the conversation before it came to a natural conclusion. but in a cupboard. You put your packages in the boot of your car not the trunk. and lose time. but they do not like to be rushed and they do not like deadlines. is that we are a very time-oriented society-time is money to us-whereas in other cultures time is to be savored. Some are similar to Japan. An apartment house is a block of flats. and garters are suspenders. Even then the Latin American is slow to get down to business and will not be pushed. In keeping with the culture.” Neither statement is completely true though both contain some truth. P-time is characterized by a much looser notion of on time or late. Latin Americans depend greatly on friendships but establish these friendships only in the South American way: slowly. These Western cultures tend to concentrate on one thing at a time. nothing more. deeper involvement with individuals. Most low-context cultures operate on M-time.” helps to explain some of the differences between U. and so on up the building. If you called up someone. bide time. The managing partner of the Kuwait office of KMPG Peat Marwick LLP says of the “flying-visit” approach of many American businesspeople. The Japanese see U. will probably not bring a doctor.C. The differences between M-time and P-time are reflected in a variety of ways throughout a culture. A ladder is not used for climbing but refers to a run in a stocking. Researchers also found that Brazilians more often described themselves as late arrivers. not spent. P-time is characterized by the simultaneous occurrence of many things and by “a great involvement with people. How people perceive time 11. If you want to buy a sweater. but can the two com-municate? It is difficult unless you understand that in England: Newspapers are sold at bookstalls. over a considerable period of time. which thwart the easy development of friendships. businesspeople as too time bound and driven by schedules and deadlines. he is only referring to your wake up call. Interruptions are routine. “What in the West might be regarded as dynamic activity-the ‘I’ve only got a day here’ approach-may well be regarded here as merely rude. Arabs may make rapid decisions once they are prepared to do so. Edward Hall defines two time systems in the world: monochromic and polyphonic time.S. it means to-your British-friend1hatyou have drafted the person—probably for military service. delays to be expected. P-Time Versus M-Time North Americans are a more time-bound culture than Middle Eastern and Latin cultures. a stud is a collar button.625. A bathing dress or bathing costume is what the British call a bathing suit. you should ask for a jumper or a jersey as the recognizable item will be marked in British clothing stores. not postpone it as in the United States. where appointments are adhered to with the greatest M-time precision but P-time is followed once a meeting begins. allowed greater flexibility in defining early and late. however. Germans. and for those who want to. waste time. Any reference by you to an M. When you table something. For example.prolonged. and other indications of directness are all manifestations of M-time cultures. It is not so much putting things off until manana but the concept that human activity is not expected to proceed like clockwork. managers and those from other cultures. Marketers who expect maximum success have to deal with foreign executives in ways that are acceptable to the foreigner. go shopping. spend time. When the desk clerk asks what time you want to be knocked up in the morning. Swiss. A billion means a million (1000000000000) and not a thousand millions as in the United States.” and their view of us is “you are always prompt. typifies most North Americans. A typical Latin American is highly formal until a genuine relationship of respect and friendship is established.2 © Copy Right: Rai University 63 . The P-time system gives rise to looser time schedules. adjustments need to be made for a harmonious relationship. Suspenders are braces. which is the toilet. When businesspeople from M-time and P-time meet. were less concerned about being late. P-time.D. The ground floor is the main floor. What is true. it is essential to know that a tunic is a blouse. M-time is used in a linear way and it is experienced as being almost tangible in that we save time. When one of your British friends says she is going to “spend a penny.” she is going to the ladies’ room. or water closet. Our stereotype of those cultures is “they are always late. or polychronic time. They divide time into small units and are concerned with promptness. and a wait-and see-what-develops attitude. M-time.

companies need to examine their positions on women managers in international business. To the unknowing American. saying “no” is to be avoided at all costs – to say no is rude. “we’ll deal with it. friendship between vendors and customers. When a woman manager receives training and the strong backing of her firm. where Japanese women rarely achieve even lower-level management positions. The important thing for the U. she usually receives the respect commensurate with the position she holds and the firm she represents. however. who has been taught not to take no for an answer. or May be or I Don’t Know. “know your opponent. “may be. and so on. represen- INTERNATIONAL MARKETING Crossing Borders 7 When Yes Means No. In Japan. respect.clarity can be gained by specifying tactfully. Evidence suggests. Literally it means yes. Other euphemistic. When the maintenance of long lasting stable personal relationships is of utmost importance. and importance attributed to the firms they represent. As global markets expand. Thus. One standard rule in negotiating is “know thyself’ first.” We will think about it. Hurt feelings postponed. it most likely means that he or she wishes to say no. But it is important to remember that the negotiating process is complicated and the risk of misun64 © Copy Right: Rai University 11. Questions such as.” When a Japanese avoids saying yes of no clearly. As women move up in domestic management ranks and seek career-related international assignments. foreign female executives benefit. and then leave the conclusion extremely ambiguous. Each negotiator’s understanding and interpretation of what transpires in negotiating sessions is conditioned by his or her cultural background the possibility of offending one another or misinterpreting each other’s motives is especially high when one’s SRC is the basis for assessing a situation. Even in those cultures where a female would not ordinarily be a manager. a foreign woman will not be any more acceptable. and even some European women are not typically found in upper levels of management. Americans generally respond directly with a yes or no and then give their reasons why. however. “ he said NO!’ All cultures have ways to avoid saying no when they really mean no. arguments can be avoided. Gender Bias in International Business The gender bias toward women managers that exists in many countries creates hesitancy among U. This is but one of the myths used to support decisions to exclude women from foreign assignments. and disrupts harmony. multinational companies to offer women international assignments. But don’t be misled – the Japanese listen politely and . for example. “what did he say?” The prompt reply. decorative no’s sometimes used by Japanese: “ it’s very difficult.” My older child asked the younger sibling.S.2 . as in Japan to say no is to be avoided because of the possible damage to a relationship. manager to learn is adjustment to P-time in order to avoid the anxiety and frustration that comes from being out of synchronization with local time.” Or they leave the room with an apology.S. An often-asked question is whether it is appropriate to send women to conduct business with foreign customers. respond with hai. or? Once my youngest child asked if we could go to the circus and my reply was. and second. expected to wear veils. when the American if finished. they relate to the product. Latin American.625. As a result the Japanese have developed numerous euphemisms and paralinguistic behavior to express negation. In Saudi Arabia. derstanding increases when negotiating with someone from another culture. companies become more international.S. In some cultures. at least initially. This ambiguity often leads to misunderstanding and cultural friction. more businesspeople from P-time cultures are adapting to M-time. The basic elements of business negotiations are the same in any country. The prime minister responded with. Attitudes brought to the negotiating table by each individual are affected by many cultural factors and customs often unknown to the other individuals and perhaps unrecognized by the individuals themselves. It is a fact that men and women are treated very differently in some cultures. one example at the highest levels of government occurred in negotiations between the Prime Minister of Japan and the President of the United States. may not respond at all. its price and terms. An American who has been working successfully with the Saudis for many years says he has learned to take plenty of things to do when he travels. When a company gives management responsibility and authority to someone.S. whether a meeting is to be on Mexican time or American time. This is especially true if the cultures score differently on Hofstede’s PDI and IDV value dimensions. Others schedule appointments in their offices so they can work until their P-time friend arrives. services associated with the product. Negotiations Emphasis All the just-discussed differences in business customs and culture come into play more frequently and are more obvious in the negotiating process than any other aspect of business. To some it appears logical that if women are not accepted in managerial roles within their own cultures. a large measure of the respect initially shown that person is the result of respect for the firm.” to a request by the president. from the status. This cultural bias raises questions about the effectiveness of women in establishing successful relationships with host country associates. women are segregated. The Japanese tend to embark on long explanation first. offensive. “I hear you. After all.” The SRCs of both parties can come into play here if care is not taken. and finally. Are there opportunities for women in international business? And should women represent U. but usually it only means. Traditional roles in male-dominated societies often are translated into minimal business opportunities for women. Etiquette dictates that Japanese may tell you what you want to hear.S. It was only later that the U. firms abroad? Frequently arise as U. side discovered that such a response generally means no – to the frustration of all concerned.” We’ll give this some more thought. or are evasive. resistance to her as a female either does not materialize or is less severe than anticipated. In many cultures-Asian. for example.” “I’m not sure. Arab. the unwillingness tosay no is often misinterpreted to mean that there is hope – the right argument or more forceful persuasions is all that is needed to get a yes. and forbidden even to drive. that prejudice toward foreign women executives may be exaggerated and that the treatment local women receive in their own cultures is not necessarily an indicator of how a foreign businesswoman is treated.

regardless of gender. it seems shortsighted to limit the talent pool simply because of gender. Being foreign is such a major difference that being a woman is relatively minor. companies need to be represented by the most capable personnel available. As world markets become more international and as international competition intensifies.2 © Copy Right: Rai University 65 . second as representatives of firms. and then as males or females.625. firms are seen first as Americans. INTERNATIONAL MARKETING 11.S. U.tatives of U. in China “businesswomen from the West are almost like ‘honorary men’ Once business negotiations begin. women in China are seen as foreigners first and women second. the willingness of a business host to engage in business transactions and the respect shown to a foreign businessperson grow or diminish depending on the business skills he or she demonstrates. As one researcher notes.S. Similarly.

TI conducts an international survey of businesspeople. for example. you have committed a felony and face up to five years in prison. those countries receiving low scores are not pleased. Leaders of the region realize that democracy depends on the confidence the people have in the integrity of their government.69 Exhibit 5-2 Country Denmark (1) Finland (2) Norway (7) Singapore (9) Switzerland (11) U. where apparently it costs less to buy officials. A(16) France (20) Czech Rep.66 2. there were no U.94:1: 9. but for publicly held corporations the Securities and Exchange Commission’s (SEC) rules required accurate public reporting of all expenditures. Long considered almost a way of business life. For U. A major complaint of U. as the most corrupt.33 9. If you are German. In Latin America.76 7. India.S. however. At the time.96 2.29 3.2 . and the general public to determine their perception of corruption in various countries. businesses. If you are an American and you agree.94 out of a maximum of 1-0. Transparency Intemational1997 Corruption Perception Index* (Selected Countries 1997 & 1996) CPI 1997 CPI 1996 Country 9.43 2.63 550 2. bribery and other forms of-corruption now have been criminalized.37 Italy (30) S Korea (34) Brazil (36) China (41) India (45) Mexico (47) Russia (49) Nigeria (52) CPI 1997 CPI1996 5.27 1. The United States advocacy of global ant bribery laws has led to an accord by the 29 member nations of the Organization for Economic Cooperation and Development (OECD) to force their companies to follow rules similar to 66 those that bind U. businesses is that other countries do not have legislation as restrictive as does the United States. many executives were faced with charges of violating SEC regulations. was perceived to be the least corrupt and Nigeria. but to raise public awareness that will lead to constructive action. In the 1997 Corruption Perception Index (CPI). It may be some time before the accord becomes binding. with a score of 9. Denmark. laws against paying bribes in foreign countries. In fact.S.58 0. the-organization-of American States (OAS) has -taken a global lead in being the first to ratify an agreement against corruption.61 7. The actions of the GAS coupled with those of the GECD will obligate a majority of the world’s trading nations to maintain a higher standard of ethical behavior than has existed before.92 8. and that corruption undermines economic liberalization.66 6.76 3. Consider this situation: Suppose your company makes large. What is commonly accepted.S. firms. although that drops to between 8 percent and 11 percent in India.S. The Asian deduction is 15 percent.87 8. or Japanese. among others.05 8.625.INTERNATIONAL MARKETING LESSON 10: BUSINESS ETHICS AND BRIBERY Business Ethics The moral question of what is right and/or appropriate poses many dilemmas for domestic marketers. Even within a country. however. The problem of business ethics is infinitely more complex in the international marketplace because value judgments differ widely among culturally diverse groups. as right in one country may be completely unacceptable in another Giving business gifts of high value. Because the payoffs were not properly disclosed. firms.” failing to appreciate that it takes “two to tango” -a bribe giver and a bribe taker. and that in countries where bribes can be deducted as a business expense the laws clearly state they apply only to transactions outside that country.56 2. Payoffs are perceived by many global competitors as a necessary means of accomplishing business goals.66 8.42 2. Unfortunately. It is important to note that bribes usually violate the laws in the countries where the bribery takes place.66 5.20 9. high-priced generators for power plants and a foreign official promises you a big order if you slip a million dollars into his Swiss bank account. Dutch. since each of the member countries will have to ratify the treaty individually. you have merely booked another corporate tax deduction-the value of the bribe-and you have the contract as well. bribery became a national issue during the mid-1970s with public disclosure of political payoffs to foreign recipients by U. the © Copy Right: Rai University 11. TI is very emphatic that its intent is not to expose villains and cast blame.80 8. you didn’t do business. but in many countries of the world gifts are not only accepted but also expected. As one would expect. (27) The actions of the GECD and GAS also reflect the growing concern among most trading countries of the need to bring corruption under control.96 2.S.76. China. with a score of 1.61 6.96 5. shown in Exhibit 5-2.S. and other Asian and African countries are not members of either organization. ethical standards are frequently not defined or always clear.” Among its various activities.03 4.88 2. The business community’s defense was that payoffs were a way of life throughout the world: if you didn’t pay bribes. is generally condemned in the United States. International businesspeople often justify their actions in paying bribes and corrupting officials as necessary because “corruption is part of their culture. The issue took on proportions greater than that of nondisclosure because it focused national attention on the basic question of ethics.48 8. political analysts.75 2. policies and anti-corruption programmes. French tax authorities actually have a sliding scale of acceptable “commissions” paid to win business in different countries. French. The decision to pay a bribe creates a major conflict between what is ethical and proper and what is profitable and sometimes necessary for business. Since 1993 an international organization called Transparency International (TI) has been dedicated to “curb[ing] corruption through international and national coalition encouraging governments to establish and implement effective laws.

law. The answer to the question of bribery is not an unqualified one.effect has been to raise public ire and debates in parliaments around the world-exactly the goal of TI.8 million in bribes to Dr. agents. Bribery: Variations on a Theme While bribery is a legal issue. and cargo plane exports by the company were banned for three years. It is easy to generalize about the ethics of political payoffs and other types of payments. Culturally. Leila Takla. The process is further complicated by legal codes that vary from country to country. it is bribery if an executive of a company offers a government official payment if the official will incorrectly classify imported goods so the shipment will be taxed at a lower rate than correct classification would require. or a service given to a low-ranking official in a country where such offerings are not prohibited by law. Takla to lobby successfully for three air cargo planes worth $79 million to be sold to the military. On the other hand. the dilemma of ethics and pragmatism that faces international business cannot be resolved until the anticorruption accords among the OECD and OAS members are fully implemented and multinational businesses refuse to pay extortion or offer bribes. a member of the Egyptian national parliament.625. businesses from paying bribes openly or using middlemen as conduits for a bribe when the U. and so forth) who function simply as conduits for illegal payments. an agent may be hired to represent the company in that country. it is much more difficult to make the decision to withhold payment of money when the consequences of not making the payment may affect the company’s ability to do business profitably or at all. Change will come only from more ethically and socially responsible decisions by both buyers and sellers and governments willing to take a stand. official knows that part of the middleman’s payment will be used as a bribe. The activities under this umbrella term range from extortion through subornation to lubrication. There are many middlemen (attorneys. A first step in understanding the culture of bribery is to appreciate the limitless variations that are often grouped under the word bribery. An example of extortion would be a finance minister of a country demanding heavy payments under the threat that a contract for millions of dollars would be voided. lawful performance of a duty by that official. while others. The company now maintains one of the most comprehensive ethics and legal training programs of any major corporation in the United States. For example. an attorney 11. like the United States. For example. extortion may seem to be less morally wrong because the excuse can be made that “if we don’t pay we don’t get the contract” or “the official (devil) made me do it.S. the intermediary’s fees are being used unlawfully. if a part of that agent’s fees is used to pay bribes.” But even if it is not legally wrong. A small payment made to dock workers to speed up their pace so un-loading a truck take few-hours rather than all day is an example of lubrication.2 may be hired to file an appeal for a variance in a building code on the basis that the attorney will do a more efficient and thorough job than someone unfamiliar with such procedures.S. on the other hand. Subornation and Lubrication : Another variation of bribery is the difference between lubrication and subornation. a gift. INTERNATIONAL MARKETING © Copy Right: Rai University 67 . an official who knows of an agent’s intention to bribe may risk penalties of up to five years in jail. firms paying bribes. Some cultures seem to be more open about taking bribes.37 Lubrication involves a relatively small sum of cash. what is illegal in one country may be winked at in another and legal in a third. fined $25 million. however. or to break the law. Regardless of where the line of acceptable conduct is drawn. attitudes are significantly different among different peoples. distributors. the lure of contracts is too strong for some companies. in exchange for Dr. designed to entice an official to commit an illegal act on behalf of the one offering the bribe. the company pled guilty in 1995 to paying $1. The Foreign Corrupt Practices Act has had a positive effect. it is morally wrong-and in the United States it is legally and morally wrong. On the surface. Lubrication payments accompany requests for a person to do a job more rapidly or more efficiently. it is extortion if payments are extracted under duress by someone in authority from a person seeking only what they are lawfully entitled to.s. Under U. there is no country where the people consider it proper for those in position of political power to enrich themselves through illicit agreements at the expense of the best interests of the nation. While this is often a legal and useful procedure. generally involves giving large sums of money. This is a practice common in many countries of the world.39 Even though there are numerous reports indicating a definite reduction in U. subornation is a request for officials to turn their heads. Lockheed Corporation made $22 million in questionable foreign payments during the 1970s. Voluntarily offered payments by someone seeking unlawful advantage is bribery.S. to do their jobs more quickly. The Foreign Corrupt Practices Act (FCPA) prohibits U. are publicly contemptuous of such practices but are far from virtuous. The purpose of such a gift is to facilitate or expedite the normal. Subornation. Lockheed was caught. When a businessperson) is uncertain of a country’s rules and regulations. the implication being that had there been no FCPA there would have been no lost business. The Secretary of Commerce has stated that bribery and corruption cost U. A third type of payment that can appear to be a bribe but may not be is an agent’s fee. it is also important to see bribery in a cultural context in order to understand different attitudes toward bribery. Bribery and Extortion : The distinction between bribery and extortion depends on whether the activity resulted from an offer or from a demand for payment. frequently not properly accounted for. Lockheed’s actions during the 1970s were a major influence on the passing of the FCPA. to not do their jobs.S. For example. With the variety of ethical standards and levels of morality that exist in different cultures. It would be naive to assume that laws and the resulting penalties alone will put an end to corruption. firms $64 billion in lost business in just one year.

the law may help define the borders of minimum ethical or social responsibility.” France The precision of clocks also tells a lot about a culture. right or wrong. (3) environmental protection. One of the most serious causes of frustration and friction in cross cultural business dealings occurs when counterparts are out of sync with each other.” Ethiopia “Before the time. being socially responsible and ethically correct is not a simple task for the international marketer operating in countries whose cultural and social values. “ United States “Those who rush arrive first at the grave. Simply stated they are: Principle Utilitarian ethics Rights of the parties Justice or fairness Question Does the action optimize the “common good” or benefits of all constituencies? Does the action respect the rights of the individuals involved? Does the action respect the canons of justice or fairness to all parties involved? INTERNATIONAL MARKETING Answers to these questions can help the marketer ascertain the degree to which decisions are beneficial or harmful. Unfortunately. foreign investments. An American visiting a Latin American country may arrive at his host executive’s office for a 10 A. (4) political payments and involvement in political affairs of the country. but to a Saudi it may be an insult. subjective. and (5) basic human rights and fundamental freedoms. he was more than three hours off when he said it was “exactly 2:14. When a man in brazil was queried about the time. Ethical and Socially Responsible Decisions To behave in an ethically and socially responsible way should be the hallmark of every businessperson’s behavior. or behaving in a manner that would bring bodily harm or damage.49 The researcher suggests that an action should only be taken if the answer is no to the question. he was told by a postal employees in the central post office that he didn’t know the time but to go outside and ask a street vendor. or where the company willing to “do what is necessary” is favored over the company that refuses to engage in certain practices.M. the American stands a better chance of preserving friendly relations if he accepts the Saudi’s offer. For example: “Time is money. States. the need for smooth interpersonal transactions and business strategies also grows. even an egg will walk. the host may not appear until 11 A. but the law is only the floor above which one’s social and personal morality is tested. determine what ought to be done. the difficult issues are not the obvious and simple right or wrong ones. his host may feel no need to apologize to the American as this is normal practice in this 11. fairness.M. and respect for others-were the most often selected regardless of cuIture. In many countries. domestic or international. For example. denying someone his or her rights.the international marketer faces the dilemma of responding to sundry situations where-there is no local law. its perceived nature. after the time.” When the researcher ask the time in Jakarta. Perhaps the best framework to work within is defined by asking: Is it legal? Is it right? Can it withstand disclosure to stockholders. Differences often appear with respect to the pace of time. In normal business operations there are five broad areas where difficulties arise in making decisions. “Is the action a violation of a core human value?” When people are clear about their own values and can identify the principles and core values that make up ethical behavior. Participants in 43 countries and more than 50 faiths were given 17 values and asked to rate each as a core value. harming the environment. and international negotiations. and engaging in business operations: (1) employment practices and policies. appointment at 9:55 A.” Nigeria “if you wait ling enough. where local practices appear to-condone a certain-behavior.M. (2) consumer protection. if a Saudi Arabian host offers an American visitor a cup of coffee. establishing policies. In a study on how cultures keep time. it’s too late.Crossing Borders 9 Time : A Many Cultured Thing Time is cultural. and/or economic needs are different from those of the marketer. In many countries. The statement that “there is no controlling legal authority” may mean that the behavior is not illegal but it does not mean that the behavior is morally correct or ethical. Practices taken for granted in one country face varying degrees of probability of achieving desirable results in another. taking unfair advantage. no matter where a person lives. There are three ethical principles that provide a framework to help the marketer distinguish between right and wrong. responsibility.2 © Copy Right: Rai University . Insights into a culture’s view of time may be found in its sayings and proverbs. to the public? One researcher suggests that regardless how corrupt a society might be there are core human values that serve as the underpinning of life.” In fact. While the American may be fuming at having to wait over an hour. Politely refusing-a cup of coffee may be acceptable behavior in the United. “Ethical business conduct should normally exist at a level well above the mini68 Cultural Considerations In International Marketing: A Classroom Simulation James B. or whether the consequences of actions are ethical or socially responsible. to company officials.625. they have the tools for looking at potential decisions and deciding whether or not a decision is ethical. honesty. However.” Spain “the clock did not invent man. as the offer of a cup of coffee is an expression of Saudi hospitality and a symbol of one’s honor. It requires little thought for most of us to know the socially responsible or ethically correct response to questions about knowingly breaking the law. Five values-compassion. mum required by law” or “controlling legal authority. In short. and properly justify his or her actions. it is not yet the time. the researcher found: Clock are slow of fast by an average of just 19 seconds in Switzerland. Stull San Jose state University With the constant increase of multinational companies (MNCs). and variable. laws are the markers of past behavior that society has deemed unethical or socially irresponsible. and its function.

Political Systems If religion provides people with a sense of why they are on this earth. Language ways to solve problems. and other intellectual tools reflect the educational and technological development of a culture. they may be written or unwritten. war.This simulation’ is designed to illustrate how the sensitive businessperson may be the’ one who approaches another culture by attempting to adopt the viewpoint of that particular culture. Some of the legalities an MNC must consider include location. Economic forces such as employment. and low gross domestic products and agriculture. geography.” Arabs have over 6. technology. One must also look at the country’s population. its parts and equipment. family relationships. Simulating International Business People organize activities and role relationships consistent with other cultural values and expectations. society. property. and commodity agreements also affect international business. They reflect the attitudes of the culture. and multinational companies are also clearly political. communism. Education Educational systems are culture-specific. You may wish to add these variables to the simulation. taxes. money. and controls over the host country imposed by still other nations. it can tell us a great deal about how other people live and think as well. Buddhism. social unrest. and telephones. governmental powers. political systems. and more. Simulation are a popular. Astronauts train for space flight through simulations. Attitudes and Values Political-environments both within and between countries are major considerations when conducting international business. two seventy-five-minute sessions-per week marketing class. Technology determines how a country uses its land. labor. it may consciously and subconsciously dictate how they conduct their lives. competition. class structure. balance of payments. wealth and material gain. problem-solving techniques. Diffusion of innovations into a culture depends heavily on literacy. more cars. Islam. The tenets and canons followed by most religions often contain prescriptions and proscriptions about greed and the attainment of wealth and material items. The Arabic word for “citizen” translates roughly as “one who performs Allah’s will. or indigenous.000 words for camel. social and reference groups (including labor unions. supervisor subordinate relationships. structure. . The MNC may be forced to take severe action because of sudden changes in a host country’s environment. improved labor forces. Religious groups. Politicians exercise controls over resources and how people use them. It also leads to further technologic innovation. climate. technicians. Law 69 11. Components Of Culture Culture is a complex pattern of consistent behaviors which can be broken into components for the purposes this exercise. let’s consider those proposed by Vern Terpstra in his first edition of the cultural entities and values. widely used method of teaching and training people in the development of various skills. Social Organisation Laws are rules of a culture established by authority. It can easily be adapted to fit the needs of any group.host’s business environment. Language may be the most reliable indicators of other components of a culture. capital. and more. lobbying independence. while it “walks” in some Spanish-speaking countries. ecological systems. Eskimos have more than twenty five words for “ snow” but no word for “ war. and new international alliances Legal Systems A people’s attitudes and values about certain topic are important to that society’s economic development and its people’s behavior. work-and achievement. promulgating norms as a vein of cultural existence. new This simulation was originally designed for a fifteen-week. labor unions. and behavior can often be traced to religious philosophies. Most of the world fits into one of the following legal systems: common. Technology INTERNATIONAL MARKETING Language reflects the philosophy and lifestyle of a group of people. Also characteristic of technologically developed cultures are more urban dwellers. televisions. People who study languages learn much more about other people than merely how they speak. Although numerous religions existent of the world fits into six basic religious categories: animism (primitive religions). social organization. and legal systems. trademarks. increased technological development. foreign exchange risk. Hinduism. civil. Studies show a high correlation between educational enrollments in secondary and higher levels of education and a country’s economic development. and higher expenditures for research and development. Judaism is found primarily in Israel. antitrust.” Nearly one-half of English is made up of scientific and technological terms. income. which typically leads to better communication systems. new ideas. radios. Of particular concern are attitudes and values about time. friendships. and transportation. Additional considerations might involve controls over importing.625. gross national product.) gender roles. and education. A clock “runs” in the United States. patents. engineers. exporting. natural resources. education. managerial styles. Religion The artifacts. finances. high gross domestic products and manufacturing. high per capita expenditures on education. Airplane pilots and automobile drivers learn on simulators. material symbols. It also conditions people to think and behave in certain ways.2 © Copy Right: Rai University . Discoveries about aircraft in flight have been made in wind tunnels. Religions plays major role in their development. quantitative systems. or custom. and. with approximately forty students per section. Important considerations include a culture’s origin and history. Attitudes. Islam and Christianity. and plant and animal life. Studies show high positive relationships between per capita incomes and per capita energy’ consumption. but they are not discussed in detail here. values. more scientists. Multinational corporations (MNCs) are always at risk politically when they enter a foreign arena to conduct business. including competing political philosophies.

Exports include rum. or the United States. emerged in the past few years allowing merchants to experience other coun tries’ ways of doing business. Some areas of the country are run down and the people are extremely poor. and textiles. Canada. The Lounges people revere education and encourage their children to learn as much as they can. in a very dry desert region. and air raid drills. The oil industry has modernized part of the country. It produces steel. and Tao Communism has been the main form of government since the 1920s. Here is one way to successfully experience the benefits of this simulation. so that each culture group and an expert on each of the separate components making up that culture. Dharma: Dharma. Some technological advancements have been made in the capital and two other large cities. a former British colony. An excellent source of information for this phase of the simulation is Vern Terpstra. Weeks 10-15: On the first day of this phase you will be assigned to a new group.students experience trial conditions through moot courts. The economy is historically poor. social organization. Village children typically receive no formal education. religion. virtually impossible for the education to be put to use. Week 1 : you will be assigned to a research group to find out as much as you can about one of the following variables: language. education. Bwana still relies on tribal laws that have been handed down through generations. and some machinery. and tapioca. Zulu. attitudes and values. safety. dozens of pre-Columbian dialects are spoken in rural 70 villages.9: Your group will present your findings daringness class period. the moon. corn. Plan for one concept to be presented each class period. One-member from each of the research groups from the first nine weeks will be assigned to a culture group. Buddha. Catholicism is the primary religion: however. they are intentionally similar to real cultures so that you can make INTERNATIONAL MARKETING © Copy Right: Rai University 11. Guerrilla warfare leaves Feliz politically unstable : Although the official language is Spanish. You should develop ways for your audience to actually experience your concept or component as it is experienced in other cultures. Each new group will function as a business organization representing one-of the following five -cultures: Bwana. disaster training. and precious metals. Germany. Weeks 6. The Koran. Leung : Leung is located in Asia. Koran imports a great deal from the rest of the world. Koran : Koran is situated in the middle east. but many lounges leave to seek opportunities elsewhere. Recent ventures have resulted in foreign-owned high technology computer assembly plants being set up and operated near the port cities. but formal training is limited to trade schools and technology centers. Simulations are also used widely in management training machine and interpersonal simulations have given trainees ideas about what to expect and how to react to probable leadership situations. Organised religion has made little impact on this tiny nation. and they make great sacrifices to be sure that their children go to school. through some 200 different dialects may be heard. The country has produc4ed and exported oil since 1938. but the younger generation want to see change soon. believing that spirits inhabit everything. and Dharma. other levels of technology are low. but the country’s economy makes it. Great Britain. Feliz : This Central American country is constantly in the world news. political systems. lumber. Education is very important to the Dharmese people. The average citizens believes in the country. technology. obviously fictitious. as the information will be used during the next module. but Islam dictates that Muslims adhere to tradition. Be sure to take notes and participate in this phase. coal.2 . and cement. rubber trees. Children often leave Dharma to study in England. Bwana : This African republic is slowly beginning to trade with the rest of the world. legumes. Civil law is followed in Feliz. but most of the people live in rural villages where tribal leaders determine what needs to be learned. many children complete their secondary education. weeks 10-1 5. cotton. and waterfalls. although some English is spoken in the capital city. iron. The primary language is Arabic. ivory. sugar. and they tend not to return to their homelands except to visit their families. and other forms of simulation. tea. Cincinnati: South-Western. In the cities. rice. Most of the people are animistic. Although these cultures are. 1978. A significant number of those who have been educated and trained in Western countries are beginning to return to help develop their native land. Bwana is rich with gems. Security.625. Cantonese is spoken throughout the country. some preCatholic animism still exists as the local brufo or shaman is frequently seen waving incense pots and chanting at village churches. people worship volcanoes. Islam is the only religion with Muslims following the word from the holy book. The government is primarily socialist. Feliz. with strong ties to the English common law system. and the United States. Children can get a formal education in ht capital city. The people speak Hindi. lifeboat. and is also abundant with fertilizer. Koran enjoys a strong’ fishing industry. Leung exports rice. Koran. where fishing is extremely popular and politics seem not to exist. Tourism is strong on the Caribbean coast. Because of its success with oil the per capita income is one of the highest in the world. Most Dharmese practice Hinduism. and medical personnel train to deal with various hazards and obstacles through fire. The Cultural Environment Of international Business. A simulation is an operating model of real life in which participants a can experience much of what would happen without suffering many of the negative consequences. The main exports are rice. Its level of technology is far-behind countries such as Japan. petrochemicals. and motor vehicles. However. Most of the children receive a solid education. and legal systems. wheat. is located on the Indian subcontinent. Leung. A very traditional slowly emerging country. Some free trade zones have. Weeks 1-5: Your group should pace itself and prepare to present your research findings to the class sometime during weeks six through nine. The people follow the teachings of Confucius. First aid personnel practice cardiopulmonary resuscitation on inflatable dummies. but its primary language is Swahili. Desalinization plants have helped Koran provide water for agriculture and industry.

the objective of which had been awareness of the Nissan Micra product. Your overall goal is to market a product. since any innovative program was certain to be expensive relative to staying with the current program. management decided that the only way to reverse the trend was to develop and execute an ongoing relationship building campaign. Develop business and marketing strategies that you believe will be sensitive to the idiosyncrasies of each. 4. “First given the economic situation described above. The price of the new model was up 20 percent from one year ago. even a small success would be greeted with great satisfaction.Obviously. 6. Research real cultures that you perceive as similar so that you can make reasonable inferences about life in the fictitious culture. product line. no one inside or outside the company expected success. or idea that you believe is compatible with your own culture and that you could market successfully to the other culture.000 U.4 percent of Micra owners buy another Micra. INTERNATIONAL MARKETING Objectives Nissan Denmark had several objectives. car sales in Denmark were at their lowest level in thirty years. To make the problem even more difficult. By accomplishing these long term objectives. Procedure for Weeks 10-15 You will need to go through the following steps to complete the phase of the simulation: 1. or other Nissan models. You don’t have to invent something. Second. and an initial approach to the problem. Study the other cultures to gain some familiarity with their cultural components. both short and long term. Historically. The long-term objectives were set to guarantee Nissan Micra’s future. Your instructor may modify this simulation to meet theneeds of your particular class. management was willing to take a chance on a really bold program because the situation was becoming quite critical. which were carefully organized and managed. both of these objectives were important to demonstrate that the Micra remained a practical choice for Danes purchasing a new car. in a good year. dollars in Denmark. focusing on bow you felt and what you learned while you were simulating international business. 5. in Denmark. and even Nissan’s overall future. general agency. due to the continuing recession.reasonable inferences that will help you succeed in this simulation. They were able to do this because they had very little to lose and much to gain: Organising The Team By hiring both a direct marketing agency and a respected market research firm. Denmark Deborah Fain New York University Introduction In 1992 the Micro. longer term. 11. This may take a few class days. Moreover. cost $20. 2. You will negotiate with each other culture persisting-until a contract has been settled or until you perceive that a stalemate has been reached. 7.” Working with their advertising agency. Nissan Micra.Together all four team members-client. The key was using a test drive to motivate previous or current Micra owners to purchase a new Micra. marketing costs had increased by at least 10 percent in each of the past five years. Focus on developing specific verbal and nonverbal language norms which will be observed during negotiations with other cultures.2 © Copy Right: Rai University 71 . service. so a loss would not cause great concern.S. in Denmark. specifically targeting currently satisfied customers. Short-Term Objectives The first short-term objective was to sell 200 Nissan Micras through a test drive program. 3. some short-term and others long-term. Nissan actually accomplished all of its objectives. The reason usually given is price. Your success will depend on how well you know the other culture and how well you adapt your business and marketing strategies to each. Discuss the simulation. 8. Third. Nissan Denmark and the agency were also looking ahead to the. direct marketing agency and research firm-developed marketing questions hypotheses. Nissan’s smallest car. Long Term objectives The first long-term objective was to develop an ongoing communications/ relationship maintenance program for current micro owners. its own specialists to develop a clear understanding of its own identity regarding each component. Nissan could develop targeted mailings to get potential buyers to test drive a new Micra. Each culture must consult. The advertising agency brought in a research firm and a direct marketing agency to assist in development and execution of the new relationship-building campaign. You must identify a product. only 35.000 small cars are sold each year. However. or idea to the other culture. This new program was in addition to the ongoing print campaign. The second was to develop ongoing methodology to target the highest sales potential customers. by the following steps. Only 9. Nissan Denmark addressed this situation by developing and executing a truly innovative database marketing program. That made it the most expensive car in its class. service. Nissan and its general advertising agency ensured that whatever program was developed would be based on a higher level of expertise than the ad agency alone would have been able to provide to the client.625. The second was to reduce the average marketing cost below the current $400 per car. as part of an ongoing promotional program. This campaign had been running in Denmark for several years. other culture.

To Muslim women wearing hijab. age. firm. and the man involved selects what seems appropriate to him. Why must western women be slaves to appearance. skin-tight dresses that are impractical arid uncomfortable. taken. Muslim women are equal to men but not the same as men. “Why? ”In defense of the practice. “traditional. etc. Mahjubah: The Magazine for Moslem. 2. often-wonder why Western women wear skimpy. luxury goods (pre-Khomeini) elitist. consider this question: based on the data available to you at this moment. special skills. Now the market has opened once more.S. Traditional core Middle Eastern marketing patterns : open bazaars. and that is how Muslim women cover themselves. ‘hijab’ means more than an outer garment.) Also consider media selection.. can be described as three communities in one: Modern core Department stores. and so on. Worker zones Concentric circles around both cores. Consider that before the Ayatollah Khomeini’s revolution. with separate sections for specialists (e. without thereby alienating their men. INTERNATIONAL MARKETING Beneath Hijab Marketing to the Veiled Women of Iran Jeffrey A.). also patronized by middle class. each less wealthy than its predecessor. particularly those who continue to wear the black ‘chadur. fathers. Once you have described your ideal candidates.” As a consequence. Product image : In what ways must the product image be modified to conform to Iranian religious. Then came Khomeini. and so on. market to the female population of Iran’s Describe in detail.” and urban worker clientele. considering that these are entirely imposed by men. The essay should include your responses to the following: 1. suburban.g. you should consider specifics about Iranian distribution out lets. How can you reawaken that demand? How can you stimulate the demand for Western goods (or. Questions Assume that Iran’s new leaders now welcome U. Iran’s respect revolution. labeling the United States “the Great Satan. Western goods became equated with religious evil. like many in the Middle East. men and women are physically and psychologically different. lower-middle-class. suggesting a number of specific measures that might be 72 © Copy Right: Rai University 11. as marketing director of a small U. Develop a strategy outline and a mailing plan. On-site project head : Considering both the legacy-of hostility that Iranians feel toward America and their longrange fascination with’ Western goods. 3. but describe those personal characteristics (sex.625. language potential.” in deference to the opinions of Iranian men. extending outward until they blef1d into the rural villages.Assignments 1. and other men shop for them. Generate list of marketing questions and hypotheses 2. ethical.and middle – class women often do their own shopping. businesses. and moral norms. Product selection : What type of product (goods or service) could you. one of the most annoying questions asked by Western women is. Western oriented -clientele. forever listening to the media about how to be glamorous? Why must they have to look beautiful for strangers to ogle them in public places? Why do western feminist groups want to turn women into men? Muslim women wonder whether such questioning of gender roles is a sign of strength or actually a sign of weakness. Justify your choice of product. street of the silversmiths. Fadiman San Jose state University Hijab means modest dress. the heart must be modest as well. Segment market : Which segment of the market should you target as an initial clientele describe in detail. lower class and more traditional middle class women do not. thereby conforming to hijab either by preference or in deference to male authority? Justify your modifications. responses to this question should take the form of an essay. Justify your modifications (note: although upper.) that the ideal candidate should possess to deal with Iranians. Iran’s cities. 3. including sex. and moral beliefs of the nations. attempt to test. Iran’s women showed enormous and increasing interest in a wide range of U. Prioritize the mailing and develop a data-driven plan. family go-downs. residential pattern (rural. etc. 5. Women (an English-language journal published in Iran for foreign distribution) ran an article examining hijab from the perspective of Muslim women. point-ofpurchase strategies. who among your classmates would appear to be the best selection Justify your choice. potential distribution outlets. Justify your choice of segment. temperament. age. goods often wearing them “beneath the hijab. According to the article.S. what type of individual would you select to launch this first-time effort within the country? Assume his or her professional qualifications to be adequate. Each sex has its own rights and place in society. after a drought of years. requiring only that the members of each firm respect the religious. social class.2 . Muslim women. services) among Iranian women without generating anxiety on the part of Iran’s (all male) religious and secular authorities? Your. urban). (small general stores) clustered along tiny street. appearance. 4. The problem is how to market products or services that entice women. specialty shops. on the other hand. This case was prepared as a basis for classroom discussion rather than to illustrate effective or ineffective handling of a business situation. from which the cities draw their food. Women wear hijab to because they weak but because of the high status given to them by Allah and because of their desire to adhere to Islamic morality such. ethical. As you write your essay. Their husbands.S. Product modification : In what ways should the product (or service) be modified to stimulate demand by women.

there are two major patterns.2 © Copy Right: Rai University . It makes a lot of difference what kind of heads one is counting. a. in Western Europe have reached a stationary population. Latin America has only two relatively populous countries: Brazil with 161 million and Mex-ico with 93 million. nation in the world has about 10. Age. education or occupation. Of course. has four countries with populations over 57 million. so population figures in himself or herself are not usually a sufficient guide to market size. At the other extreme. Of course. the better the market. and its determination requires an ad hoc analysis. certain general indicators are relevant for many goods. Although most countries experience some population many countries. for exam-ple. This is because many marketing decisions will be af-fected by future developments. many of these are very small. One striking fact is the tremendous differences in size of the nations of the world. On a more practical level.000 times the population of the smallest countries.S. Distribution of Population Understanding population figures involves more than counting heads. The marketer concerned primarily with individual markets. other things are never equal.3 percent annually to 2010. sell in over 150 countries. many firms recognize different mar-ket segments related to age groupings. and gross national product. such as ethical drugs. and educational supplies. much smaller in land area but more densely populated. the consumption of many products is correlated with population fig-ures. Singer and Komatsu. Of a total world population of about~ billion in 2010.People in different stages of life have different needs and present different marketing opportunities. Size of The Market The firm’s concern in examining world markets is the potential they offer for its products. For example. the international marketer faces the traditional task of economic analysis. bicycles. The World Bank projects the high-income countries’ population will grow at 0 y . the low-income countries are expected to grow at 2. For other products that are low in price or meet particular needs. By contrast. This helps allocate effort among present markets and determine which markets to enter next. The number of these nations that are worthwhile markets varies according to the firm’s situation. ballpoint pens. for example-in ways that show the relevant segments of the market. In the U. We will see how world markets are described by the following general indicator (1) population growth rates and distribute and (2) incomedistribution. but regional pat-terns can also be important for regional logistics. health care items. Thus. Population figures are one of the first considerations in analyzing foreign economies. population also may be a useful market indicator. However. Generally. market. The international marketer must determine market size not only for present markets but also for potential markets. The United Nations Statistical Yearbook lists data for over 200 political entities. the Middle East. For many “necessary” goods. Turkey is the largest market with 63 million people. Population Growth Rates The international marketer must be concerned with population trends as well as the current population in a market. many companies sell in over 100 markets. other things being equal. which have only 20 percent in the dependent 0-14 73 Population It takes people to make a market and. The population figures should be classified-by age group. and sewing machines. Market size for any given product is a function of particular variables. Asia contains six of the ten most populous markets. and about 60 have fewer than 1 million people. be di-rected toward answering two broad questions: (1) How big is the market? and (2) What is the market like? Answers to the first question help determine the firm’s market potential and priorities abroad. The investigation will. the World Bank counts 133 countries with a population of over 1 million. with 115 million people. Nigeria is the only populous African nation. Africa. Products in these latter categories include soft drinks. but in a context that may include 100 countries or more. Possible markets are numerous. China and India are expected to grow at a slower rate but will still add over 300 million to their combined populations. Income per casita. This chapter addresses the economic dimensions of individual world markets.625. Well over half the people of the world live in the ten coun-tries that have populations of more than 100 million. This means that about 40 percent of their population is in the in active. Nevertheless. population figures may be a good first indicator of market potential. The developing countries are experiencing population growth and have relatively short life ex-pectancies. Answers to the second question help deter-mine the nature of the marketing task. UN mem-bership itself counts about 185 countries. however. sex. Europe.2 percent yearly. However. dependent 0-14 age group adjust over half in the productive 15-64 age group. and Latin America are rather thinly populated. Contrast that with the rich industrialized countries.INTERNATIONAL MARKETING TUTORIAL A The second dimension of the economic environment of international marketing includes the domestic economy of every nation in which the firm is selling. one for the developing countries and one for the industrialized countries. the larger the pop-ulation in a country. Each country has a somewhat different pro-file as to age groupings. two-thirds of the countries have populations of less than 10 million. The largest 11. some food products. the high-income countries will account for less than 1 billion’s. On the other hand.

Few nations have a very equal distribution of income among their people. pollution control. Many consumer goods sales correlate more closely with population or household figures than with per capita income. Purchasing Power Not Reflected. Distribution of Income Some way of understanding the size of a market is to look at the distribution of in-come within it. many goods that figure in the national income of developed nations does not figure in the national incomes of poorer countries. On a regional basis. The United States. population densities range. Per capita income comparisons are expressed in a common currency-usually U. That is less than 2 percent of the $25. Partial justification for using this figure in evaluating a for-eign economy lies in the fact that it is commonly available and widely accepted. Five-sixths of-the world’s population has less than one-fourth of the world’s GNP. speculation can further pull a currency away form its “true” value. Figures for 1998 show Mozambique at $90 per capita and Switzerland at $44. A coun-try’s external supply and demand have quite a different character from supply and demand within the country. This is only about one-fifteenth of the population density of the Netherlands. but the high-income economies are somewhat better than the other coun-try categories. from less than reasons per square kilometer in Oceania to about 120 per square kilometer in Asia. or a country’s imports and exports plus speculative demand. these figures show a grim picture of many world mar-kets. in fact. 4. Furthermore. Density. 3. There is a great difference in population density among na-tions and regions of the world. a good indicator of the size or qual-ity of a market. In the United States. the following words of caution are in order. A large part of a North American’s budget. The World Bank finds over50 percent of the world’s popula-tion living in countries with an average per capita income of only $490. a signifi-cant amount of U.625. For example. If mar-kets are people with money. Therefore. A more pertinent justification is that it is. Sales Not Related to Per Capita Income. heating buildings and homes. goes for food. This figure is used as a shorthand expression for a country’s level of economic development.group versus two-thirds in the 15-64 groups and over oneeighth in the over-65 category. many goods entering into the national income totals of the developed economies are only partially in the money economy in less developed countries. Other things being equal.2 . In many less developed nations. Second. this is not the case. these items may be largely self-provided and therefore not reflected in national in-come totals. bicycles. the usefulness of per capita income figures. The supply and demand determinants of that price are the demand for and supply of foreign exchange. 1. of course. national income is derived from such items as snow removal. and gross national product. however. however. military and space expenditures. A third limitation to using per capita income figures to indicate market potential is that the sales of many goods show little correlation with per capita income. b. Even with a mod-ern transportation network. clothing. and winter-vacations in Florida or other warmer states. Uneven Income Distribution. Promotion is also facilitated where population is concentrated. for example. The bank reports provide a good starting point for foreign market studies. it is not surprising that the external value of a currency (the exchange rate) may be different from the domestic value of that cur-rency. and shelter. had a population density of 29 persons per square kilometer in 1998. Industrial goods and capital equipment sales generally correlate bet-ter with the industrial structure or total national income than with per capita income. We will look at three aspects of income in foreign markets: the distribu-tion of income among the population. which has well over 100 million citi-zens in that group. per capita figures are less meaningful if there is great unevenness of income distribution in the country. espe-cially. it is necessary to examine various income measures in a country to go along with a population analysis. This “senior” category is a very important market in the high-income countries.S. sewing machines. and tran-sistor radios. Gross national product (GNP) 74 © Copy Right: Rai University 11. The dollar figure for a country is derived by dividing its per capita income figure in national currency by its rate of exchange against the dollar. Gross National Product (GNP) Another useful way to evaluate foreign markets is to compare their gross national products. agricultural support programs. There is often reason for doubting that it does.870 average for the high-income countries. Another limitation to the use of per capita income figures is that there is a twofold lack of comparability. The exchange rate is the price of one currency in terms of another. if most people of the country are near the average. distribution costs in the United States are likely to be higher than in the Netherlands. First. Frequently.320 as the extreme cases. 2 Lack of Comparability. INTERNATIONAL MARKETING Income Markets require not only people but also people with money. but also in China. Some examples might be Coca-Cola. Finally. The resulting dollar statistic for a country’s per capita income is accurate only if the exchange rate re-flects the relative domestic purchasing power of the two currencies. Because per capita income figures are relied on so ex-tensively. The concentration population is important to the marketer in evaluat-ing distribution and communication problems. dollars-through an exchange-rate conversion.S. the marketer prefers to operate in markets with con-centrated populations. Per capita income figures are averages and are meaningful. Thus. for example. ballpoint pens. The per capita income figures vary widely among the countries of the world. marketers are very attentive to differences in income levels if their product is at all income sensitive: Per Capita Income The statistic most frequently used to describe a country economically is its per capita income.

manufacturing. In. where most of the population may live. These operations depend on supporting facilities and services outside the firm. (3) the takeoff. Although their construction can be difficult. it is useful to rank countries by GNP. economic analysis through input-output tables is becoming more common. including those produced by the nation’s physical endowment. the better the firm can perform its production and marketing tasks there. the technique is worth mastering.S. Topography The surface features of a country’s land. including rivers.625. the marketer will find that power is available only in the cities. topography. Even medical needs in the tropics are different from those in temperate zones. the firm must adapt its operations. Most nations are smaller and have more uniform climatic patterns. railroads. (4) the drive to maturity. the Andes Mountains divide many South American countries into entirely separate areas. As our data improve.2 © Copy Right: Rai University 75 . These features interest the international marketer for they indicate possible physical distribution problems. and humidity. marketing. Land area as such is not very important. and other communication and transport services. total GNP is a better indicator of market potential than is per capita income. Climate is an important determinant of the firm’s product offerings. Farm or Factory? One way to determine the kind of market a country offers is to look at the origin of its national product. all the nations of the world are in one of the following levels of economic development: (1) the traditional society. not in the villages or countryside. Mountains are always a barrier that raises transportation costs. The marketing opportunities and problems encountered by the International firm vary according to the host country’s stage of economic growth. its infrastructure.5 11. except as it figures in population density and distribution -problems. An obvious example is the heater or air conditioner in an automobile. INTERNATIONAL MARKETING Physical Endowment Natural Resources A nation’s natural resources include its actual and potential forms of wealth sup-plied by nature-for example. Each level represents a dif-ferent type of economy. The commercial and financial infrastructure includes such things as advertising agencies and media. lakes. dryness. climate also affects a whole range of consumer goods from food to clothing and from hous-ing to recreational supplies. and service industries? Such an analysis is especially useful to industrial marketers. However. marketing research companies. it can gain a better idea of how its supplies or equipment fit in with the indus-trial structure in given markets. Climate Another dimension of a nation’s physical endowment is its climate.measures the total domestic and foreign value added claimed by residents. minerals and waterpower-as well as its land area. forests. distributive organizations. Where this is true. or perhaps avoid the market altogether. The international marketer needs to understand the eco-nomic geography of a nation in relation to the marketing task there. and their use is increasing in international marketing. Infrastructure of the Nation A manufacturing firm generally divides its activities into two major categories: production and marketing. The more adequate these services in a country. For example. For example. and (5) the age of high mass consumption. Such tables are often used in U. Gross domestic product (GDP) is GNP less net factor income from abroad. rain. that is. differing production and marketing systems. They include paved roads. the marketer often finds that culturally and economically they are separate markets. snow. However. Flat country generally means easy transportation by road or rail. For certain goods. deserts. According to Rostow. foreign economies have other characteristics that affect a marketing program. and mountains are its topography. Energy The statistics on energy production per capita serve as a guide to both market po-tential and the adequacy of the local infrastructure. Finally. local natural resources can be important to the international marketer in evaluating a country as a source of raw materials for local production. there are invariably differences in the consumption patterns of the farmer compared with those of a factory worker. and climate. and credit and bank-ing facilities. population and transportation situation to anticipate marketing and logistical problems. Nature of Economic Activity Rostow’s View The stages of economic growth described by economist Walt Rostow provide a use-ful description of foreign economies. the nature of its economic activity. which includes riot only the temperature range. However. and its degree of urbanization. Mountains also may divide a nation into two or more distinct markets. The international marketer analyzes the topography. The United States is very large and has great climatic variations within its borders. These external facilities and services are called the infrastructure of an economy. but also wind. Input-Output Tables If the firm can construct input-output tables for its industry for relevant mar-kets. even consumer goods marketers find that consumer demands and mentality are related to the nature of economic activities in the country. energy supplies. Where these facilities and services are not adequate. Marketers of electrical ma-chinery and equipment and consumer durables are concerned about the extent of electrification throughout the market. Deserts and tropical forests also separate markets and make transportation difficult. Nature of The Economy In addition to their size and market potential. Although these areas are united politically. countries with low energy consump-tion. Is the economy agricultural or industrial? What is the na-ture of its agricultural. Energy production is also closely inflated to the overall industrialization of an economy and thus is cor-related to the market for industrial goods there. (2) the preconditions for takeoff.

communication. distribution channels. and air transport varies by country but the World Bank has no good comparable data. Transportation The importance of transportation for business operations needs no elaboration. It should be helpful. Conversely. in giving the market analyst a feel for the relevant dimensions of national economies.2 . That means the others had more serious challenges with double-or triple. Where international companies are allowed to operate. less than one half had single – digit annual 76 inflation rates for the period 1990. Such a partnership provides its own constraints on the international company. but in much of the world the urban-rural differences persist. Inflation Each country has its own monetary system and monetary policy—except for the 11 European countries in the Euro group. a firm must be able to communicate with its various audiences. In a number of countries. Extractive industries go into a country for raw-material supply rather than for marketing reasons. rail. Transportation capabilities. between extractive industries and manufacturing or marketing subsidiaries. INTERNATIONAL MARKETING © Copy Right: Rai University 11. advertising agencies. For information here the firm needs local sources in the market. Foreign Investment in the Economy When contemplating operations in a foreign economy. Of all the nations analyzed by the world Bank. Urbanization One of the most significant characteristics of an economy is the extent to which it is Urbanized the degree of urbanization. It can also consult with transportation companies. and energy. international companies may have the government as a partner in a joint venture. A distinction must be made. Modern transportation and communica-tion have greatly reduced the differences between urban and rural populations in the United States. Numerous cultural and economic differences exist between people in cities and those in villages or rural areas. Other Characteristics of Foreign Economies Our survey or foreign economies has been introductory rather than exhaustive. of course. These differences are reflected in the attitudes of the people. This is especially true in less developed countries that lack a strong private sector to provide the capital. The share of road. If government has strong Socialist leanings.capabilities of a nation is its commercial infrastructure. or worse. This information gives clues as to the government’s attitude toward foreign companies. Role of Government The business environment and the nature of business operations in an economy are very dependent on the role government plays in that economy. which affect costs and effectiveness. Before concluding this chapter. an economy that has many international companies operating in it indicates an open market but one that may be very competitive. especially workers. infrastructure. By this is meant the avail-ability and quality of such supporting services as banks and financial institutions. Wherever the commercial infrastructure is weak. Commercial Infrastructure Equally as important to the firm as the transportation.625. That a country has few or no international companies operating in it could indicate a good opportunity for one to enter-or it could indicate that the environment is inhospitable. the international marketer is interested to know what other international firms are operating there. we look briefly at a few other characteristics of foreign economics that can be important in operations there. Firms accustomed to strong supporting services at home often find great differ-ences in foreign markets. The result is differing financial environments and rates of inflation among countries.digit rates.energy production per capita is probable best single indicator as to the adequacy of a country’s over-all infrastructure. the firm must make adjustments in its operations. it may restrict the sectors of the economy where private companies may be engaged. the international marketer needs to be aware of the situation particular to each market. and marketing research organizations. One good example is given in “ Global Marketing” Avon in the Amazon. It helps to determine something about the competitive environment the firm will encounter. governments have regulations restricting their operations. Intra company communications between subsidiaries or with head-quarters depend equally on local facilities. Communi-cations with those outside the firm depend on the communications infrastructure of the country.1996. suppliers and customers. Because these differences are important determinants of consumer behavior. and modes vary significantly from coun-try to country depending on the topography and level of economic development.” Communications In addition to being able to move its goods. river.

efficiency.g. rate. (4) export subsidies. Therefore. South Korea’s trade barriers. issued by the U. Another problem with protectionism is that it may lead to inflation. do not represent an insolated case. These classifications are not necessarily mutually exclusive. Trade Representative.g. The argument is based on the assumption that import reduction will create more demand for local product and subsequently create more jobs. Reducing Unemployment It is a standard practice for trade unions and politicians to attack imports and international trade in the name of job protection. (3) government procurement. often at the expense of local consumers as well as consumers worldwide. Enhancing National Security Protectionists often present themselves as patriots. Arguments for the protection of local industries usually take one of the following forms: (1) keeping money at home. (7) investment barriers. Protecting Infant Industry The necessity to protect an infant industry is perhaps the most credible argument for protectionist measures. In practice it is not an easy task to protect industries. Instead of using protective relief to gain or regain market share and for competitive investment. They usually claim that a nation should be self sufficient and willing to pay for inefficiency in order to enhance national security. otherwise. with the latter being the less common one. length. The report classifies the trade barriers into eight categories. price. labeling. tariffs. Restrictive businesses practices and government regulations designed to protect public health and national security are not considered as trade barriers. (3) equalizing cost and price. (2) reducing unemployment. even products. Opponents of protectionism dismiss appeals to national security. testing. When export tariffs are levied. In practice.S. it is hard to understand why price and cost have to be artificially equalized in the first place. costs and objectives vary greatly among countries. defines trade barriers as “ government laws. Trade between nations takes place because of price differentials.. the government has to make sure that the resultant protection is only temporary. free trade is woefully ignored by virtually all countries. A nation can never be completely self . making it impossible to determine just what cost need to be equalized.) 77 11. South Korea serves as a good example. or proactive that either protect domestic producers from foreign competition or artificially stimulate exports of particular domestic products. and customs barriers). and (5) protecting infant industry. This argument is not persuasive to most analysts for several reasons. They argue that foreign goods have lower prices because of lower production costs. Second. however. they usually apply to an exporting country’s scarce resources or raw materials (rather than finished manufactured products. quotas.2 © Copy Right: Rai University . regulations. The National Estimate Report on Foreign Trade Barriers. (2) standards. First. Some industries need to be protected until they become viable. raw materials. there is no incentive to trade at all. the government must identify deserving industries. and distributions point. Protection of Local Industries Why do nations impede free trade when the inhibition is irrational? One reason why governments interfere with free marketing is to protect local industries.625. licensing. Direction: import and Export Tariffs Tariffs are often imposed on the basis of the direction of product movement that is. 1. Regulations are created to keep out or hamper the entry of foreign made products. Finally. local manufactures often cannot resist the temptation of increasing their prices for quick profits. 2 there is a question of how long an “ infant ” needs to grow up to bean “ adult ” .sufficient because raw materials are not found in the same proportion in all areas of the world.. (1) Import policies (e. Despite the advantages. on imports or exports or exports. First. can also be indicators of wealth. (6) services barriers (e. Marketing Barriers Tariffs Tariff. (4) enhancing national security. or list of charges. is a customs duty or a tax on products that move across borders. and (8) other barriers. making foreigners richer and local people poorer this argument is based on the fallacy of regarding money as the sole indicator of wealth. policies. and certification. (5) lack of intellectual property protection. nations are inclined to discourage free trade. purpose. Other assets. It has performed well by selectively protecting infant industries for export purpose. Tariffs can be classified in several ways. derived from a French word-meaning rate. Equalizing Cost and Price Some protectionists attempt to justify their actions by invoking economic theory. restrictions on the use of foreign data processing). Keeping money at Home Trade unions and protectionists often argue that international trade will lead to an outflow of money. Next.INTERNATIONAL MARKETING TUTORIAL B: TRADE DISTORTIONS AND MARKETING BARRIERS Free trade makes a great deal of sense theoretically because it increases efficiency and economic welfare for all involved nations and their citizens. Is it caused by labor. to determine the cause of price differential is unusually difficult. trade barriers are needed to make prices of imported products less competitive and local items more competitive. The classification scheme used here is based on direction. even if the causes of price differentials can be isolated and determined. or subsidy? Furthermore. appropriate incentives must be created to encourage productivity.

. 15 percent. each time a product changes hands. A tariff surcharge is a temporary action. ad valorem. This tax is intended to compensate for similar taxes levied on domestic products. gauge. Usually. It is a national sales tax levied at each stage of the production and distribution system. a revenue tariff is relatively low. and combined. When Japanese and other foreign cars are imported into the United States. in comparison. sold. are at least straightforward and obvious. 25¢/ square yard. The types of participation include administrative guidance. in contrast. a tax must be paid. The distinction is based on purpose. Japan’s ad valorem tariffs on beef and processed cheese are 25 percent and 35 percent. 4. When Harley Davidson claimed that it needed time to adjust to Japanese imports. These indirect taxes. A value added tax (VAT) Is a multistage. though generally undesirable. three kinds of tax rates must be distinguished specific. whereas a countervailing duty is permanent surcharge. their export prices become more competitive (i. value added. are more elusive or nontransparent. and Combined How are tax rates applied? To understand the computation. To protect the local industry. Specific duties are a fixed or specified amount of money per unit of weight. the effect is uneven. The rebate of this tax when the goods are exported. or other measure of quantity. 3. Single stage sales tax is a tax only at one point in the manufacturing and distribution chain.4 percent to 45 percent for one year and then declined to 35 percent. That is. Government Participation in Trade The degree of government involvement in trade varies form passive to active. An excise tax is a one time charge levied on the sales of specified products. Non-tariff barriers. while no tariff barriers have become more prominent. have high import duties that hinder the import of fully built cars. are of four kinds: single stage. lowers their export prices. the impact of no tariff barriers can be just as devastating. Prices of imports are raised by charging imported goods with (in addition to customs duties) a tax usually borne by domestic products. state trading. Alcoholic beverages and cigarettes are good examples. is to generate tax revenues for the government. and labor against foreign competitors by trying to keep foreign goods out of the country. $2/ton. and excise. The South American markets. Length: Tariff Surcharge versus Countervailing Duty Protective tariffs can be further classified according to length of time. the tariff may be 10¢ per pound plus 5 percent ad valorem. Based on this method. ad Valorem. lower) when such products are relieved of the same tax that they are subject to when produced. a government provides an export subsidy by rebating certain taxes if goods are exported. But the tax collected at that point. Rates: specific. they are specific rates of so many dollars or cents for a given unit of measure (e. The tariff on heavy motorcycles jumped from 4. in effect. INTERNATIONAL MARKETING Marketing Barriers: Nontariff Barriers Tariffs. as the impact of tariffs. President Reagan felt that it was in the national interest to provide import relief. Under this system. Based on a standard physical unit of a product. there is a direct relationship between the total duties collected and the prices of products. Because the duties are constant for low.2 . Ad valorem duties are duties “according to value” They are stated as a fixed percentage of the invoice value and are applied as a percentage to the dutiable value of the imported goods. Cascade taxes are collected at each point in the manufacturing and distribution chain and are levied on the total value of a product. any critical examination of this would demonstrate that the tax rate is applied to the imported and domestic products. including taxes borne by the product at earlier stages. © Copy Right: Rai University 11. Countervailing duties are imposed on certain imports when foreign governments subsidize products. For exported products. These duties are thus assessed to offset a special advantage or discount allowed by an exporters government. Sellers in the chain collect the VAT from a buyer. the absolute amount of total duties collected will increase or decrease with the prices of imported products. even between middlemen. In other words.625. and consumed domestically. and finally 10 percent in subsequent years. Often disguised. both rates are used together. this method is discriminatory and effective for protection against cheap products because of their lower unit value. cascade. a tariff surcharge was used. respectively. noncullative tax on consumption. Tariffs have declined in importance. Any critical examination of this would demonstrate that the tax does not domestic products. In lower process of exports. Distribution point: Distribution and consumption taxes Some taxes are collected at a particular point of distribution or when purchases and consumption occur. The purpose of a revenue tariff. Brazil has a 50 percent import tax on imported “ flyaway ” plans. and remit the balance to the government. American cars exported to Japan are subject to variety of import taxes.g. though only on the value added at that stage. rather than on the invoice value alone.. They 78 are duties based on both the specific rate and the ad valorem rate that are applied to an imported product. for instance. etc.e. agriculture. There is a greater impact on the import because the tax is usually levied on the full CIF. For example. Combined rates (or compound duty) are a combination of the specific and ad valorem duties on a single product.2. deduct the amount of VAT they have already paid on their purchase of the product. Compared to a protective tariff. The purpose of a protective tariff is to protect home industry. $1/ gallon. and subsidies. On the other hand. Purpose: protective and Revenue Tariffs Tariffs can be classified as protective tariffs and revenue tariffs. duty-paid value. 20 percent.) product casts or prices are irrelevant in this case. Many countries have a turnover or equalization tax. if not more.and high priced products of the same kind. though in some countries only the rate producing more revenue may apply. 5. there is a 3 percent duty. frequently adjusted at the border.

1. Administrative Guidance many governments routinely provide trade consultation to private companies. Japan has been doing this on a regular basis to help implement its industrial policies. This systematic cooperation between the government and business is labeled “Japan, Inc.” to get private firms to conform to the Japanese government 2& #1& s guidan ce, the governm ent uses a carrot and stick approach by exerting the influence through regulations, recommendations, encouragement, discouragement, or prohibition. Japan’s government agencies’ administrative councils are influential enough to make importers restrict their purchases to an amount not exceeding a certain percentage of local demand. 2. Government procurement and state trading state trading is the ultimate in government participation, because the government itself is now the customer or buyer who determines what, when where, how and how much to buy. In this practice the state engages in commercial operations, either directly or indirectly, through the agencies under its control, such business activities are either in place of or in addition to private firms. 3. Subsidies According to GATT, “subsidy is a “financial contribution ” provided directly or indirectly by a government and which confers a benefit ” subsidies can take many forms- including cash, interest rate, value added tax, corporate income tax, sales tax, freight, insurance, and budgetary subsidies are among the various subsidy policies of several Asian countries.

through customs. At the very least, such complicated and lengthy documents serve to slow down product clearance. 4. License or permit not all products can be freely imported; controlled imports require licenses or permits. For example, importations of distilled spirits, wines, malt beverages, arms, ammunition, and explosives into the United States require a license issued by the Bureau of Alcohol, Tobacco, and Firearms. India requires license fro all imported goods.18 an article is considered prohibited if not accompanied by license. It is not always easy to obtain an import license, since many c untried will issue one only if goods can be certified as being necessary. 5. Inspection is an integral part of product clearance. Goods must be examined to determine quality and quantity. This step is highly related to other customs and entry procedures. First, inspection classifies and values products for tariff purposes. Second, inspection reveals whether imported items are consistent with those specified in the accompanying documents and whether such items require any licenses. Third, inspection determines whether products meet health and safety regulations in order to make certain that food products are fit for human consumption or that the products can be operated safely. Fourth, inspection prevents the importation of prohibited articles. Marketers should be careful in stating the amount and quality of products, a from the United states, for instance, have a potential for selling very will in the Japanese market. But a major obstacle is that every single bat must carry a stamp of consumer safety, and this must be “ ascertained ” only after expensive on dock inspection, more delay, and more expenses. 6. Health & Safety Regulations - many products are subject to health and safety regulations, which are necessary to protect the public health and environment. Health and safety regulations are not restricted to agricultural products. The regulations also apply to TV receivers, microwave ovens, Xray devices, cosmetics, chemical substances, and wearing apparel.

INTERNATIONAL MARKETING

Customs and Entry Procedures
Customs and entry procedures can be employed as no tariff barriers. These restrictions involve classification, valuation, documentation, license, inspection, and health and safety regulations. 1. Classification- How a product is classified can be arbitrary and inconsistent and is often based on a customs officer 2& #1& s judgment, at least at the time of entry. The U.S customs reclassified Nissan 2& #1& s imported truck cabs and chassis from “ parts ” with 4 percent duty to “ assembled vehicles ” subject to 25 levies instead. 2. Valuation- Regardless of how products are classified, each product must still be valued. The value affects the amount of tariffs levied. A customs appraiser is the one who determines the value. The process can be highly subjective, and the valuation of a product can be interpreted in different ways, depending on what value is used (e.g., foreign, export, import, or manufacturing costs) and how this value is constructed. 3. Documentation - Documentation can another problem at entry because many documents and forms are often necessary, and the documents required can be complicated. Documentation requirements vary from country to country. Usually, the following shipping documents are either required or requested commercial invoice, Performa invoice, certificate of origin, bill of landing, pacing list, incurrence certificate, import license, and shippers export declarations. Without proper documentation, goods may not be cleared

Product Requirements
For goods to enter a country, product requirements set by that country must be met. Requirements may apply to product standards and product specifications as well as to packaging, labeling, and marketing. 1. Product standards each country determines its own product standards to protect the health and safety of its consumers. Such standards may also be erected as barriers to prevent or to slow down importation of foreign goods. 2. Packaging, Labeling, and marking packaging, labeling, and marketing are considered together because they are highly interrelated. Many products must be packaged in a certain way for safety and other reasons. 3. Product Testing Many products must be tested to determine their safety and suitability before they can be marketed. This is another area in which the United States has some troubles in Japan. Although products may have won approval everywhere else for safety and effectiveness, such

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products as medical equipment and pharmaceuticals must go through elaborate standards testing that can take a few years 2& #1& just long enough for J apanese companies to develop competing products. 4. Product specifications -product specifications, though appearing to be an innocent process, can wreak havoc on imports. Specifications can be written in such a way as to favor local bidders and to keep out foreign suppliers. For example, specifications can be extremely detailed, or they can be written to closely resemble domestic products. Thus, they can be used against foreign suppliers who cannot satisfy the specifications without expensive or lengthy modification.

Exchange controls also limit the length of time and amount of money an exporter can hold for the goods sold. 2. Multiple exchange Rates multiple rates a form of exchange regulation or barrier. The objectives of multiple exchange rates are twofold: to encourage exports and imports of certain goods and to discourage exports and imports of certain goods and to discourage exports and imports of others. This means that there is no single rate for all products or industries. But with the application of multiple exchange rates, some products and industries will benefit and some will not. 3. Prior import Deposits and credit Restrictions. Financial barriers can also include specific limitations or import restraints, such as prior import deposits and credit restrictions. Both of these barriers operate by imposing certain financial restrictions on importers. A government can require prior import deposits (forced deposits) that make imports difficult by tying up an importer 2& #1& s capital. In effect the importer is paying interest for money borrowed without being able to use the money or get interest earnings on the money from the government. Credit restrictions apply only to imports; that is, exporters may be able to get loans from the government, usually at very favorable rates, but importers will not be able to receive any credit or financing from the government. Importers must look for loans in the private sector-=- very likely at significantly higher rates, if such loans are available at all. 4. Profit Remittance Restrictions another form of exchange barrier is the profit remittance restriction. ASEAN countries share a common philosophy in allowing unrestricted repatriation of profits earned by foreign companies. Singapore, in particular, allows the unrestricted movement of capital. But many countries regulate the remittance of profits earned in local operations and sent to a parent organisation located abroad.

INTERNATIONAL MARKETING

Quotas
1. Quotas are a quantity control on imported goods. Generally, they are specific provisions limiting the amount of foreign products imported in order to protect local firms and to conserve foreign currency. Quotas can be used for export control as well. An export quota is sometimes required by national planning to preserve scarce resources. From policy standpoint, a quota is not as desirable as a tariff since a quota generates no revenues for a country. There are three kinds of quotas: absolute, tariff, and voluntary. 2. Absolute Quotas- An absolute quota is the most restrictive of all. It limits in absolute terms the amount imported during a quota period. Once filled, further entries are prohibited. Some quotas are global, but others are allocated to specific foreign countries. 3. Tariff Quotas- A tariff quota permits the entry of a limited quantity of the quota product at a reduced rate of duty. Quantities in excess of the quota can be imported but are subject to a higher duty rate. Through the use of tariff quotas, a combination of tariffs and quotas is applied with the primary purpose of importing what is needed and discouraging excessive quantities through higher tariffs. 4. Voluntary Quotas- a voluntary quota differs from the other two kinds of quotas, which are unilaterally imposed. A voluntary quota is a formal agreement between nations or between a nation and an industry. This agreement usually specifies the limit of supply by product, country, and volume.

Partner or Enemy?
By Philip R. Agress And Krysten B. Jenci Office of Japan Trade Policy U.S. Department of Commerce There is no telling how different our streets and high-ways would look had Japanese car companies not been able to sell their cars in the U.S. market when they first came to the United States in the 1960s and 1970s. Since the days of the ultracompact Honda Civics which could barely make it up the hilly roads in California, U.S. consumers have had the opportunity to choose from a wide variety of high-quality Japanese cars and parts. In fact, in the last twenty-five years, Japan has sent 40 million cars to the United States. This competition from Japan has helped ensure that U.S. auto and auto parts companies remain top-notch, world-class competitors. Is the U.S. auto and auto parts company’s fierce competitors in the United States, they also compete aggressively all over the world. In Japan the U.S. companies have taken specific steps to tailor their products specifically to Japanese consumers. Today, American auto manufacturers sell 101 products in the Japanese
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Financial Control
Financial regulations can also function to restrict international trade. These restrictive monetary policies are designed to control flow so that currencies can be defended or imports controlled. For example, to defend the weal Italian lira, Italy imposed a 7 percent tax on the purchase of foreign currencies. There are several forms that financial restrictions can take. 1. Exchange control -An exchange control is a technique that limits the amount of the currency that can be taken abroad. The reason exchange controls are usually applied is that the local currency is overvalued, thus causing imports to be paid for in smaller amounts of currency. Purchasers then try to use the relatively cheap foreign exchange to obtain items either unavailable or more expensive in the local currency.

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market, sixty of which are right-hand drive vehicles. These include the Jeep Cherokee, Ford Probe and Mondeo, and GM Opel. More are, on the way. But in .the last/twenty-five years, the United States has only shipped 400,000 cars to Japan. In the recently concluded automobile negotia-tions with Japan, all the United States asked was that Japan provides the same free access to its market that we provide to their companies here. Denial of this ac-cess has cost substantial loss bf jobs and business op-portunities in the. United States and other countries. Ford, GM, Chrysler, and U.S. parts manufactur-ers have had great success in markets all over the world from Europe to other Asian markets. But when they have tried to sell their products in Japan, they con-fronted a web of unnecessary and burdensome regu-lations, informal and artificial barriers, and business practices that made it extremely difficult to sell their products in Japan. After a significant investment of time and re-sources trying to crack the Japanese market, these companies turned to the U.S. Government for help in trying to weed through some of the burdensome reg-ulations, break up some of the exclusive business re-lationships, and create an environment which would al-low them to sell their autos and auto parts in Japan. The Clinton Administration was eager to take on the challenge. After all, autos and auto parts represent nearly 60 percent of our trade deficit with Japan. These industries support about 2.5 million U.S. jobs in sec-tors from semiconductors to rubber and glass.

Deregulation of Aftermarket For Parts
U.S. parts suppliers also faced great difficulties trying to sell their replacement parts in the Japanese aftermar-ket. To deal with this problem, the United States sought to substantially reduce the number of Japanese regulations that greatly constrain consumer choice and the ability of foreign suppliers to have their products reach the ‘end-user. The multi-billion-dollar Japanese market for replacement auto parts is restricted by a complex system of regulations that go well beyond what is needed for safety or environmental protection. These regulations involve a complex car inspection system that forces Japanese consumers to have their cars repaired in “certified” garage_ that tend to only carry Japanese parts. The regulations also stipulate that any repair to “critical” parts must be done at special garages, and that any modifications made to cars must be reinspected. One American expert on this system recently said in a Japan Digest article, “It’s a no-brainer to say that $1 U.S.-made spark plugs should have long since captured 100 percent of a market in which Japanese plugs sell for $8 apiece. They haven’t because inspection laws com-pel drivers to use ‘authorized’ parts. Toyotas can only use pure Toyota parts, Nissans pure Nissan parts, etc. Spark plugs are just one example. Because of Japan’s closed market and the lack of competition, prices for auto parts far exceed prices in the United States. An alternator which sells for $120 in the United States sells for $600 in Japan. Shock absorbers that sell in the United States for $228 sell for $605 in Japan. As a result of the automotive agreement, Japanese consumers should now be able to save over $300 when they need new shocks for their cars by purchasing high- quality U.S. products. The agreement cuts through some of the bur-densome aftermarket regulations, and allows market forces a greater chance to work properly in ensuring that the best quality and lowest-priced products reach the Japanese consumer. The agreement specifically re-duces the number of parts on the “critical parts” list, reduces the number of modifications subject to in-spection, and makes it easier to establish garages that can sell foreign auto parts.

INTERNATIONAL MARKETING

The Agreement
After twenty-two months of intensive negotiations with Japan, a negotiating team led by Under Secretary, of Commerce for International Trade Jeffrey E. Garten, and Ambassador Ira Shapiro from USTR, reached an historic, market-opening agreement on autos and auto parts on June 28, 1995. This agreement will increase access to Japanese dealerships for U.S. auto manufacturers, help deregu-late Japan’s repair parts market, and lead to increased Japanese purchases of U.S. parts both here and in Japan. Accomplishments in these three areas should go a long way in helping U.S. auto and auto parts companies substantially increase their sales to Japanese companies.

Original Equipment Parts Purchases
In the area of original equipment parts sales to Japan-ese manufacturers in Japan as well as the. United States, the U.S. addressed a very real problem: the: closed “keiretsu” purchasing relationships between Japanese manufacturers and their key suppliers. Despite the world-class competitiveness and strong price advan-tages of U.S. parts suppliers, Japanese manufacturers have simply not been responding to market forces. To help address this situation, the five major Japanese auto manufacturers have released business plans which will lead to increased parts purchases by Japanese transplants in the United States, increased auto production in the United States, and increased im-ports of foreign auto parts into Japan. We expect that the transplants wilt purchase $6.75 billion more in parts from U.S. suppliers by 1998, Japanese car makers will increase auto production in the U.S. to 2.65 million in 1998, and Japan will import $6 billion worth of foreign parts by 1997.

Dealerships
One key problem for U.S. auto companies trying to sell their products in Japan is that they were effectively blocked from getting their cars to Japanese show-rooms. This was because Japanese dealers were afraid that their primary Japanese suppliers would retaliate against them if they entered into independent franchise agreements with foreign vehicle manufacturers. As a result of the agreement, the Japanese Government has promised to vigorously enforce its antitrust laws, and to take actions to assure Japanese dealers that they are free to carry foreign cars, without risking business re-lationships with their primary suppliers. As a result of this agreement, we expect U.S. auto companies to open an additional 200 outlets in Japan by 1996, and 1,000 new outlets by the year 2000.

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Many agencies in the U.S. Government con-tributed to bringing about an agreement in this sector so critical to our nation’s economy. The Commerce De-partment, which played a key role throughout the nearly 2 years of talks, succeeded in working with other gov-ernmental agencies and industry groups to avoid a seri-ous trade conflict with Japan, and in reaching a mean-ingful agreement. International Economic Policy’s Office of Japan led die negotiations within the Department, along with Trade Development’s Office of Automotive Affairs. Ambassador Mickey Kantor, the United States Trade Representative, acknowledged this fact when he stressed in a recent letter to Senator Bob Dole, “ . . . the Commerce Department provides essential analytic sup-port and in-depth knowledge of foreign trade practices that have been invaluable to USTR and other agencies involved in negotiation and implementing trade agree-ments . . . the Commerce Department’s detailed knowledge or-the ‘Japanese automotive sector has been essential to our efforts to open the Japanese auto and auto parts markets to foreign competition.” Of course, an international trade agreement is only as good as its implementation. The Commerce Department will be responsible for carefully monitoring and implementing this agreement. Martina Bradford, Vice President for government affairs at A T& T Corp., recently said in a Washington Post article, “trade agree-ments only yield results through vigorous monitoring, enforcement and measurement of results.” The De-partment of Commerce will implement this agreement with the vigor and energy it demonstrated in helping to negotiate it. As former Secretary of Commerce Ron Brown noted, “The Commerce Department is proud to have played such a critical role in negotiating an agreement which deals with many of the very real and specific problems U.S. businesses face in trying to penetrate the Japanese market.” The level of cooperation demon-strated by the Department of Commerce, USTR, and the U.S. auto and auto parts industries in developing an agreement which deals with such complex and tech-nical barriers and regulations in Japan should set a new standard for future negotiations in other areas.

• Deregulation of the Replacement Parts Mar-ket in

INTERNATIONAL MARKETING

Japan: A thicket of bureaucratic regulations have blocked competitive U.s. auto parts from Japan’s multibillion-dollar market for replacement parts. This agreement clears away layers of need-less regulations, introducing new competition and opening a market previously reserved for Japanese suppliers.
• Access to Dealerships: This agreement will give U.s. auto

companies increased access to Japanese dealership networks. U.S. auto companies will be able to sell through more dealerships in Japan. Japanese consumers will have the option to buy our reasonably priced, high-quality cars. We expect U.S. auto companies to open an additional 200 outlets by 1996 and 1,000 new outlets by 2000, to support the U.S. industry’s objective of exporting 300,000 vehicles by the year 2000.
• Increased Purchases of Original Equipment Parts: In

Japanese companies, the original equip-ment auto parts market is dominated by “keiretsu”-unique, interlocking relationships be-tween manufacturers, suppliers, distributors, and fi-nancial institutions. The keiretsu act unfairly to block foreign access to the market Japan’s five largest auto companies are an-nouncing plans to increase their parts purchases in North America, including diversification into high-value components such as transmissions and engines; to increase their vehicle production in North America by $6.7 billion; and to purchase $6 billion of foreign parts by 1998 for production use in Japan.

Questions
1. Does Japan’s trade success owe more to its man-ufacturing superiority or to its mercantilistic trad-ing philosophy (i.e. import barriers)? Does the Japanese government use nontariff barriers unrea-sonably to restrict imports? 2. Given the huge trade deficit the United States has with Japan, should the United States continue to trade with Japan? 3. Some claim that U.S. trade deficits are caused by U.S. adoption of a free-trade philosophy. Do you think that the United States has fewer import bar-riers than its trading partners? 4. Will protectionist measures adopted by the U.S. government be effective in increasing employment in the United States? Do you think that the U.S. government’s use of OMAs against Japanese auto imports benefits the United States? 5. What can U.S. firms (including auto makers) do to overcome Japanese trade barriers and improve their performance?

U.S.-Japan Auto and Auto Parts Agreement Fact Sheet
The United States and Japan on June 28 reached an his-toric agreement, which will result in significantly in-creased market access for autos and auto parts, and structural change in the Japanese automotive sector. This is the sixteenth trade agreement the Clin-ton Administration has completed with Japan in the past twenty-eight months-an unprecedented rate of success. These agreements have opened major trade sectors. The missing piece has been the autos and auto parts sector. This area represents $37 billion of our $66 billion trade deficit with Japan, nearly 60 percent of our Japan deficit and 25 percent of our overall trade deficit. Since auto negotiations began in October 1993, the Administration has emphasized three overriding goals for opening the auto and auto parts sector. This agreement meets our goals in’ each area:

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CASE 1: SELLING U.S. ICE CREAM IN KOREA
Effect of Controllable and Uncontrollable Factors
The call from Hong Kong was intriguing: Go to South Korea and be the franchisee of an American premium ice cream to capitalize on the Koreans’ new disposable income and their growing appetite for Western fast-food products. Within six months of my application, the government granted me permission to bring the ice cream, Hobson’s, to Seoul with only two non-tariff trade conditions: Make my ice cream in Korea after a year of operation and at the same time take on a Korean partner who had at least a 25 percent stake in the company. I agreed, and chose Itaewon for my site, figuring that between the Korean bar girls and the U.S. Army up the road it would give me a good cross-section of East and West. The Early Years-Getting Started. Almost a half-year after start-up, I still thought it was a timely idea but it certainly hadn’t been easy pickings. The Korean bar girls, for instance, thought my ice cream was too expensive, and Koreans in general are highly suspicious of new products. Government red tape has always been horrendous and foreigners are not welcome. But because internationalization and economic progress are hard to separate, Seoul had been coming to accept foreigners and their products as a necessary ingredient for their own growth. The irony, however, is that Korean intransigence was not the only problem a Yankee entrepreneur faced here: Washington trade- bashing can take its toll as well. In the mid-1990s the U.S. govern-ment had been pressuring this country to raise the value of the won, to make Korean exports more expensive and U.S. imports less. On top of this was Congress’s omnibus trade bill, which forces Korea to open its markets or face punitive sanctions on its own exports to the United States. Although these efforts were de-signed to help American traders like me, I have seen all too often how the best-laid political plans can actually make it more diffi-cult for us to maintain a foothold in these countries. In fairness, it also must be said that some American companies often bring this on themselves. Evidence indicates that American companies are badly outclassed by their failure to take Asian mar-kets seriously and a tendency to follow the laws of least resistance by concentrating on selling within the borders of the United States. American companies have tried to cheat by getting Congress to force not only Korea, but also Japan, Hong Kong, Singapore, and other countries to raise the value of their currency. Those forces drove the won to a value of 590 to 600 won for one dollar by the end of 1994, when just two years earlier $1 would buy 890 won. I thus found myself importing more dollars just to stay even with my original projections when it was 800 won to the
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dollar. In other words, it cost me 16 percent more dollars just to get started operating, and that was the margin I was hoping I could apply to- ward profits. Any price increase to recoup losses risked pricing my ice cream out of the Korean market. Another result of exchange rate jiggling was inflation. This was a by-product of the won’s strengthening against the dollar, reflected in the many outside investment dollars trying to find a home in Korea’s currency and stock market. Consequently, everything came with a price tag that equaled or exceeded what one could buy in the United States. On top of this were import taxes, tariffs, and non-tariff barriers on imported capi-tal goods and, in my case, finished ice cream. Duties, for example, ranged from 20-38 percent additional money. U.S. trade bullying also fans the flames of anti-Americanism here, and American business pays for that. Even though Washing-ton had some legitimate gripes about closed Korean markets, Koreans felt that they were being pushed around and that the United States didn’t recognize the great strides they had made. For me this resentment translated into vandalism of my storefront prop-erty, such as knocked-down signs, broken patio tables and chairs, pane-glass windows smeared with soda and dirt, and even human feces left on my doorstep. It also manifested itself by Koreans staying away from buying my ice cream. The Korean bureaucracy seemed to share the suspicion of foreigners trying to do business here. When I made arrangements for the arrival of my first ice cream shipment into Pusan a month be-fore the scheduled opening of my store, the authorities informed me that they couldn’t care less about my ice cream and that I was illegally in the country. The upshot was my lawyers spent three weeks trying to persuade some secondechelon bureaucrat that I was here under valid reasons, to no avail. Desperate, and a day away from packing my bags and buying a one-way ticket to Cali-fornia, I called the one friend I had in the government. By a one--in-a-thousand chance, he knew the second-echelon bureaucrat and was able to clear away his “mental block” about me. But this was a fluke. I have no doubt that the mental block was the Korean dairy farmers complaining about foreign imports of ice cream, which in turn was part of the bigger picture of pressure that Korean agriculture was receiving from U.S. trade negotiators to open its market. Finally, coinciding with the Olympic games in Seoul the Ko-rean economy really began to take off. By the mid-1990s South Koreans were buying more products from all over the world. The efforts of our trade negotiators and trade policies apparently were finally having some effect. A few American companies like mine were at last enjoying moderate successes in South Korea, but some were still not. The question was whether all American companies could take advantage of the “much broader access” into the Korean
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market. Some Korean business leaders criticized the level of effort of some American managers. Woo Choong Kim, founder of the Dae-woo business empire, said: “In the old days, Americans worked hard to challenge new frontiers. But as their economy got mature, they became more interested in nice houses, jogging, and having a good time than in doing business. How can you compete without dedication? It is not the management system that is not working in American companies, it is the people not working hard.” Indeed, one U.S. Commerce Secretary lamented at the time that although Americans are great at coming up with new inventions, they “are not good at getting them into products to be sold.” Establishing a Beachhead. For example, in the early 1990s Korean executives were almost throwing machine-tool and welding-machine orders at American companies-with the U.S. con-cerns dropping the ball almost every time. The reasons given by Koreans were various: inflexibility about the terms of a contract, poor service, or just plain not trying hard enough (e.g., not work-ing on Saturdays). The one American company that did measure up was Varian Associates. Its management team had projected that the bulk of world manufacturing would be done in Asia in the next few decades and that U.S. companies were missing out on Asia’s rush to outfit the factories building more and more of the world’s cars, computers, and fast-food plants. Varian installed 18 Korean nationals and several expatriates in a Seoul office to market its equipment and match Japanese service. Unlike many other American companies, Varian had ac-commodated the Korean culture and way of doing business by establishing a beachhead presence in one of the world’s fastest- growing markets. Surviving the New Disasters. For almost 10 years now the business partnership in South Korea has been rewarding. Yes, there have been ups and downs, but I myself have learned that it is important to be here and to learn their ways. In doing so, we have helped each other. The Korean company I chose to do business with, for example, is learning from me an ice creammaking tech-nology and formula that enhances its competitiveness in that in-dustry at home and abroad. I, in turn, am learning from my partner how to be competitive in Korea. Despite what we have gained from our South Korean adventure two new problems challenge us now. First is the meltdown of the Korean won during the winter of 1997-98. In that time period the won’s, value halved from 860 to the dollar to 1710 to the dol-lar. This has proven to be a disaster for our imports of ice cream, and for our fellow American competitors as well. We are some-what more competitive because part of our production is local, thank goodness. But the general consumers’ reaction against im-ports in a time of financial crisis has made the whole ice cream category less appealing. Then throw on top of that the contamination scare and our sales really tanked. This last problem got started in October 1997 when E. coil bacteria were discovered on the surface of some imported American beef here in South Korea. When Hong Kong authorities found bacteria contaminating American ice cream shipments there, Korean authorities began to check
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here as well. Sure enough, they found a different form of dangerous bac-teria in one American brand. Now all brands are receiving more scrutiny from government health officials and concerned con-sumers alike.

INTERNATIONAL MARKETING

Questions
1. Identify each of the domestic and foreign uncontrollable elements that this U.S. ice cream franchisee encountered in Korea. 2. Describe how problems encountered with each uncontrollable element may have been avoided or compensated for had the element been recognized in the planning stage. 3. Identify other problems the franchisee may encounter in the future.

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INTERNATIONAL MARKETING

CASE 2 : UNILEVER AND NESTLE-AN ANALYSIS
While Unilever and Nestle have engaged in international market-ing their entire corporate existence, they are very different compa-nies in their approaches to international marketing and corporate philosophies. Both companies maintain very extensive Web sites. Your challenge in this case is to visit both Web sites, carefully read the information presented, and write a report comparing the two companies on the points that follow. 1. 2. 3. 4. 5. 6. 7. 8. 9. Philosophies on international marketing. Corporate objectives. Global coverage, that is, number of countries in which they do business. Production facilities. Number of product categories and number of brands within each category. Number of standardized versus global brands for each. Product categories and brands where the two companies compete. Brands that are standardized, that is, what is standardized in each brand and what are localized in each brand. Product research centers.

10. Organization. 11. Environmental concerns. 12. Research and development. After completing your analysis, write a brief statement about the area(s) where Uni-lever is stronger than Nestle and vice versa, and where Uni-lever is weaker than Nestle and vice versa.

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INTERNATIONAL MARKETING

CASE 3: NESTLE-THE INFANT FORMULA INCIDENT
Nestle Alimentana of Vevey, Switzerland, one of the world’s largest food-processing companies with worldwide sales of over $8 billion, has been the subject of an international boycott. For over 20 years, beginning with a Pan American Health Organiza-tion allegation, Nestle has been directly or indirectly charged with involvement in the death of Third World infants. The charges re-volve around the sale of infant feeding formula, which allegedly is the cause for mass deaths of babies in the Third World. In 1974 a British journalist published a report that suggested that powdered-formula manufacturers contributed to the death of Third World infants by hard-selling their products to people inca-pable of using them properly. The 28-page report accused the industry of encouraging mothers to give up breast-feeding and use powdered milk formulas. The report was later published by the Third World Working Group a lobby in support of less-developed countries. The pamphlet was entitled, “Nestle Kills Babies,” and accused Nestle of unethical and immoral behavior. Although there are several companies that market infant baby formula internationally, Nestle received most of the attention. This incident raises several issues important to all multinational com-panies. Before addressing these issues, let’s look more closely at the charges by the Infant Formula Action Coalition (INFACT) and others and the defense by Nestle. The Charges. Most of the charges against infant formulas focus on the issue of whether advertising and marketing of such products have discouraged breast feeding among Third World mothers and have led to misuse of the products, thus contributing to infant malnutrition and death. Following are some of the charges made:
• A Peruvian nurse reported that formula had found its way to • In rural Mexico, the Philippines, Central America, and the

whole of Africa, there has been a dramatic decrease in the incidence of breast feeding. Critics blame the decline largely on the intensive advertising and promotion of infant formula. Clever radio jingles extol the wonders of the “white man’s powder that will make baby grow and glow.” “Milk nurses” visit nursing mothers in hospitals and their homes and provide samples of formula. These activities encourage mothers to give up breast feeding and resort to bottle feeding because it is “the fashionable thing to do or because people are putting it to them that this is the thing to do.” The Defense. The following points are made in defense of the marketing of baby formula in Third World countries:
• First, Nestle argues that the company has never advocated

bottle-feeding instead of breast-feeding. All its products carry a statement that breast-feeding is best. The company states that it “believes that breast milk is the best food for infants and encourages breast feeding around the world as it has done for decades.” The company offers as support of this statement one of Nestle’s oldest educational booklets on “Infant Feeding and Hygiene,” which dates from 1913 and encourages breast feeding.
• However, the company does believe that infant formula has

Amazon tribes deep in the jungles of northern Peru. There, where the only water comes from a highly contaminated river-that also serves as the local laundry and toilet -formulafed babies came down with recurring attacks of diarrhea and vomiting.
• Throughout the Third World, many parents dilute the

a vital role in proper infant nutrition as (1) a supplement, when the infant needs nutritionally adequate and appropriate foods in addition to breast milk and, (2) a substitute for breast milk when a mother cannot or chooses not to breast feed. One doctor reports, “Economically deprived and thus dietarily deprived mothers who give their children only breast milk are raising infants whose growth rates begin to slow noticeably at about the age of three months. These mothers then turn to supplemental feedings that are often harmful to children. These include herbal teas and concoctions of rice water or corn water and sweetened, condensed milk. These feedings can also be prepared with contaminated water and are served in unsanitary conditions.”
• Mothers in developing nations often have dietary

formula to stretch their supply. Some even believe the bottle itself has nutrient qualities and merely fill it with water. The result is extreme malnutrition.
• One doctor reported that in a rural area, one newborn male

weighed 7 pounds. At four months of age, he weighed 5 pounds. His sister, aged 18 months, weighed 12 pounds, what one would expect a 4-month-old baby to weigh. She later weighed only 8 pounds. The children had never been breast-fed, and since birth their diets were basically bottlefeeding. For a four-month baby, one tin of formula should have lasted just under three days. The mother said that one tin lasted two weeks to feed both children.

deficiencies. In the Philippines, a mother in a poor family who is nursing a child produces about a pint of milk daily. Mothers in the United States usually produce about a quart of milk each day. For both the Philippine and U.S. mothers, the milk produced is equally nutritious. The problem is that there is less of it for the Philippine baby. If the Philippine mother doesn’t augment the child’s diet, malnutrition develops. • Many poor women in the Third World bottle-feed because their work schedules in fields or factories will not permit breast-feeding. The infant feeding controversy has largely to do with the gradual introduction of weaning foods during the period between three months and two years. The average

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large batches of gruel are often made and allowed to sit. INBC announced its suspension of boycott activities. and in Febru-ary 1982 issued instructions to marketing personnel. In addition. or millet flours with water and then cooking the mixture. • Weaning foods can be classified as either native cereal gruels of millet or rice.2 © Copy Right: Rai University 87 . Accordingly. by 1978. such as the question of a warning statement. There are two basic dangers to the use of native weaning foods. Second. When the International Nestle Boycott Committee (INBC) listed its four points of difference with Nestle. successor to the Third World Institute). but there was still not universal agreement with it.625. all children beyond the ages of five to six months require supplemental feeding. Its aim was to halt promotion of infant for-mulas in the Third World. Nestle will continue to promote breast-feeding and ensure that its marketing practices do not discourage breast-feeding anywhere. Thus. In 1977. and asked the commission to review the com-pany’s instructions to field personnel to determine if they could be improved to better implement the code. the water used in cooking will most certainly be contaminated. Other issues within the code. Our company intends to maintain a constructive dialogue with governments and health professionals in all the countries it serves with the sole purpose of servicing mothers and the health of babies. Moreover. and therefore. particularly in rural areas. Nestle. weighing 20 to 30 pounds more than most women in less-developed countries. Nestle accepted those recommendations and issued revised instructions to field personnel. cannot feed only breast milk beyond five or six months. By the end of 1983. microbiological contamination of the traditional weaning foods is a certainty in many Third World settings. the Interfaith Center on Corporate Responsibility in New York compiled a case against formula feeding in developing 11. it is how to supplement mothers’ milk with nutritionally adequate foods when they are needed. delineating the company’s best understanding of the code and what would have to be done to follow it. Finding adequate locally produced. in October 1982. The claim that Third World women can breast feed exclusively for one or two years and have healthy. mass media advertising of infant for-mula began to be phased out immediately in certain markets and. Muskie. by a vote of 114-1 (three countries abstained and the United States was the only dissenting vote). In 1981. chaired by former Senator Ed-mund J. in that -UNICEF agreed to define areas of differing interpretation-in some cases providing definitions contrary to both Nestle’s and INBC’s inter-pretations. As a result. the native gruel. meetings held by UNICEF proved invaluable. staph. it again became a matter of interpretation of the requirements of the code. even after it is cooked. At that time. Other weaning foods found in use are crushed crackers. Nestle management determined it would have to apply the code in the absence of national legislation. NIFAC recommended several clarifications for the instructions that it believed would better interpret ambiguous . nutritionally sound supplements to mothers’ milk and teaching people how to prepare and use them safely is the issue.well-nourished Western woman. only 25 of the 157 member na-tions of ‘the WHO had established national codes. At the same time. successfully lobbied the World Health Organization (WHO) to draft a code to regulate the advertising and marketing of infant formula in the Third World. Acting on WHO recommendations. very few such codes were forthcoming. 118-member nations of WHO endorsed a vol-untary code? The eight-page code urged a worldwide ban on promo-tion and advertising of baby formula and called for a halt to distrib-ution of free product samples and/or gifts to physicians who promoted the use of the formula as a substitute for breast milk. is frequently contaminated with colon bacilli. INTERNATIONAL MARKETING contamination of a local native gruel with ordinary reconstituted milk formula prepared under primitive conditions. The Resolution. Nestle consulted with firms experienced and expert in developing and field-testing educational materials. • The real nutritional problem in the Third World is not whether to give infant’s breast milk or formula. The Infant Formula Action Coalition (IN-FACT. It was the meetings with UNICEF in early 1984 that finally led to a joint statement by Nestle and INBC on January 25. First. aware of changing social pat-terns in the developing world and the increased access to radio and television there.areas of the code. the cooking containers will be contaminated. “Nestle fully supports the WHO (World Health Organization) Code. They found both were contaminated to similar dangerous levels. so that it could ensure that those materials met the code. and other dangerous bacteria. were still open to debate. rice. inviting further contamination. and mashed bananas. the nutritional quality of the native gruels is low.” -this quote is from Nestle Discusses the Recommended WHO Infant Formula Code. and Nestle pledged its continued support of the WHO code. along with several other world organizations. The millet or the flour is likely to be contaminated. reviewed its marketing practices on a region--byregion basis. and the Third World Institute launched a boycott against many Nestle products. Nestle then undertook to carry out more comprehensive health education pro-grams to ensure that an understanding of the proper use of their products reached mothers. Only effective nutrition education along with improved sanitation and good food that people can afford will win the fight against dietary deficiencies in the Third World. Traditional native weaning foods are usually made by mixing maize. In May 1981 Nestle announced it would support the code and waited for individual countries to pass national codes that would then be put into effect. or commercial manufactured milk formula. • Scientists recently compared the microbiological nations. was banned worldwide by the company. Here. Nestle continued its meetings with WHO and UNICEF (United Nations Children’s Fund) to try to obtain the most accurate interpretation of the code. Nestle consulted extensively with WHO before issuing its label warning statement in October 1983. Unfortunately. sugar and water. In 1974. in May 1982 Nestle formed the Nestle Infant Formula Audit Commission (NIFAC). well-developed children is outrageous.

The New Twist. One concern is that large numbers of healthy women will switch to the bottle just to be safe. The company has a strong record of progress and support in implementing the WHO Code. pregnant women are offered testing.Nestle Supports WHO Code. as a result. The Issues. • Labels and educational materials clearly stating the hazards involved in incorrect usage of infant formula. • Limitation of supplies to those requested in writing and fulfilling genuine needs for breast milk substitutes. was composed of eminent clergy and scientists. that solution is much less feasible. in even the most infected areas. whether intentional or not. including: • Immediate support for the WHO Code. Nestle is a cultural change agent. There the problems of bottle-feed-ing remain. • No sampling to mothers. • No financial or material inducements to promote products. The group claimed that Nestle was distributing free formula through maternity wards as a promotional tactic that undermines the practice of breast-feeding. • A statement of the superiority of breast-feeding on all labels/materials. In other words. 70 percent of the mothers do not carry the virus. and distributors in February 1982 to implement the code in all Third World countries where Nestle markets infant formula. In Thailand. And. when it or any other company successfully introduces new ideas into a culture. • No mother-craft workers. The group claims that Nestle and others including American Home Products. And the vast majority of pregnant women in the de-veloping countries have no idea whether they are infected or not. as recommended by the Muskie committee to clarify and give further effect to the code. it was able to maintain its share of the Third World infant formula market. a new product formulation. Instructions to the field issued in Feb-ruary 1982 and clarified in the revised instructions of October 1982 to adopt articles of the WHO Code as Nestle policy include: • No advertising to the general public. as a result of its marketing activities.3 of the WHO Code. • Consultation with WHO. Corporate Accountability. • No use of infant pictures on labels. and organization leaders seriously concerned with Nestle’s application of the code. The key issue is what responsibility does the MNC have to the culture when. Muskie. developed in consultation with WHO/UNICEF. it causes change in that culture? Finally. • No samples to physicians except in three specific situations: • A new product. By 1978 the company had stopped all consumer advertising and direct sampling to mothers. The commission. international bodies.nestHi. in accordance with Article 11.com for details). May 1981. But in some African countries where women get pregnant at three times the Thai rate and HIV infection rates are 25 percent compared to the 2 percent in Thailand.S. to aid in determining the need for supplies in hospitals. or a new graduate physician. Alternatively. Representatives of Nestle and American Home Products re-jected the accusations and said they were complying with World Health Organization and individual national codes on the subject. • Issuance of revised instructions to Nestle personnel. limited to one or two cans of product. Nestle Policies. are given free milk powder. and testimony to this effect before the U. However. how might Nestle now participate in the battle against the spread of MV and AIDS in developing countries? INTERNATIONAL MARKETING October 1982. Congress. What are the responsibilities of companies in this or similar situations? 88 © Copy Right: Rai University 11. UNICEF. • No use of commission/bonus for sales. “babies are dying as the companies are violating the WHO resolution.625. Many issues are raised by this incident and the ongoing swirl of cultural change. WHO or Nestle? A more important issue concerns the responsibility of MNC marketing in developing nations. headed by Edmund S. A new environmental factor has made the entire case more complex: Circa 1998 it was believed that some 3. By 1988 a call to resume the seven-year boycott was called for by a group of consumer activist members of the Action for Questions 1. Coffeemate Nondairy Coffee Creamer. to ensure the company’s compliance with the code. Even though Nestle stopped consumer advertising. Nestle’s response to these ac-cusations is included on their Web site (see www. and if found HIV positive. have continued to dump formula in hospitals and maternity wards and that. • Willingness to meet with concerned church leaders.2 . How can a company deal with a worldwide boycott of its products? Why did the United States de-cide not to support the WHO Code? Who is correct. if bottle-feeding be-comes a badge of HIV infection. • Issuance of instructions to all employees. consider the notion that. The boycott focus is Taster’s Choice Instant Coffee.8 million children around the world have contracted HIV at their mothers’ breasts. Anacin aspirin. Nestle’s marketing activities have had an impact on the behavior of many people. Setting aside the issues for a moment. mothers may continue breast-feeding just to avoid being stigmatized. • No point-of-sale advertising. and Advil. the culture changes and those changes can be functional or dysfunctional to established patterns of behavior. and breastfeeding is by far the best option. agents. and NIFAC on how to interpret the code and how best to implement specific provisions including clarification by WHO/UNICEF of the definition of children who need to be fed breast milk substitutes. Further. In the early 1970s Nestle began to review its infant formula marketing practices on a region-by-region basis. June 1981. 90 percent of the child infections occur in developing countries. In affluent countries mothers can be told to bottle feed their children. • Establishment of an audit commission. As late as 1997 the Interagency Group on Breastfeeding Monitoring (IGBM) claims Nestle continues to sys-tematically violate the WHO code.

What advice would you give to Nestle now in light of the new problem of HIV infection being spread via mothers’ milk? INTERNATIONAL MARKETING 11.2. Assume you are the one who had to make the final decision on whether or not to promote and market Nestle’s baby formula in Third World countries. can protect itself in the future? 4.625. Were the decisions socially responsible? Were they ethical? 5. how do you suggest it. What could Nestle have done to have avoided the accusations of “killing Third World babies” and still market its product? 3.2 © Copy Right: Rai University 89 . or any other company. 138-39) as a guide to examine the social responsibility and ethical issues with the marketing approach and the promotion used. After Nestle’s experience. Read the section titled “Ethical and Socially Responsible Decisions” in Chapter 5 (pp.

European vacation habits were also studied. never a mistake. French and Ger-mans typically have 5 weeks’ vacation. The situation was deteriorating quickly. The table of contents was exhaustive. Within 35 minutes. For example. Over 200 locations in Europe were examined before selecting the site just outside Paris.7 billion Years Ending April (Initial Opening in April 1991) EXHIBIT 2 Attendance 1993 9. after reviewing the numbers. Eisner then turned to the attendance figures. unlike the Japanese. Whereas Americans’ average 2 to 3 weeks’ vacation. A huge potential population could get to Euro Disney quickly (see Exhibit 3). they had turned Disney into a com-pany with annual revenues of $8. 1992-1993 Six Months Ending Sept 30 EXHIBIT 1 Revenues (Frencll francs) Profit/(Loss) 1993 1. potential visi-tors could get to the 90 © Copy Right: Rai University 11.8 billion (1. “From the time they came in. never a failure. he thought. and strategic planning experts from the New York and Paris of-fices. in Southern California. In the 10 years since Eisner and his senior manage-ment team had arrived.5 million 1992 10. and Eisner had one meeting left before he could go home to celebrate a quiet holiday. they had never made a single misstep. Construction of the park alone (excluding the hotels) was approaching $2. appearing to cover virtually every detail. In preparing for the meeting with the consultants.” according to a former Disney executive. Eisner picked up the financials from the comparable periods from the initial two years’ operations of Euro Disney (Exhibit 1) and then quickly. The consultants had assembled a multidisciplinary team include financial. An article in that week’s French news magazine Le Point quoted Eisner as saying that Euro Disney might be shut down if Disney failed to reach an agreement with its creditor banks on a financial rescue plan by March 31.2 . Longer vacations. Eisner believed that Euro-peans. The consultants were asked by the consortium of bank lenders to provide an additional perspective on the prob-lems of Euro Disney and to make recommendations to Eisner and Disney management on what should be done. the most lavish project that Disney had ever built. Eisner was obsessed with maintaining Disney’s reputation for quality and he listened carefully to the designers who convinced them that Euro Disney would have to brim with detail to compete with the great monu-ments and cathedrals of Europe. Review Of Projections/The Initial Plan Eisner walked to his bookshelf from which he took down a bound copy of the initial 30-year business plan for Euro Disney. located outside of Paris. The French government was spending hundreds of millions of dollars to provide rail access and other infra-structure improvements. chairperson of Walt Disney Company. The meeting couldn’t wait until after the holidays -the topic. was that critical. compared with $1 billion in 1984. The company’s annual report for 1993 said that Euro Disney was the company’s “ first real financial disappointment” since Eisner had taken over in 1984. put them down. In developing Euro Disney. For Eisner.1 billion) 1992 3. Eisner had learned from some of the mistakes made on other pro-jects. and the strong French franc.8 billion. The plan was done in the typical detailed and methodical Disney fashion. which were also trending downward (Exhibit 2).to Euro Disney 2-hour drive 4-hour drive 6-hour drive 2-hour flights should translate into being able to spend more time at Euro Disney. Disney merely collected royalties from the park rather than having an equity ownership stake.” Eisner was particularly proud of the success of the im-mensely profitable Tokyo Disneyland.5 million EXHIBIT 3 European population proximity to euro Disney Population (Mil/ions) 17 41 109 310 Time . Eisner had vowed to make Euro Disney. Eisner was shuffling through some of the papers on his desk.625. marketing. which had more vis-itors in 1993 than even the two parks in California and Florida. The meeting was with yet another group of high-powered consultants from one of the ‘world’s most prestigious general management and strategy consulting companies. Eisner’s defense had been to publicly blame the performance on external factors including the severe European recession. what to do about Euro Disney. Disney let other companies build the hotels to house visitors and in Japan.INTERNATIONAL MARKETING EURO DISNEY(A) Michael Eisner. high interest rates.1 billion 0. with Paris being Europe’s biggest magnet for tourism. would not accept carbon copies.5 billion. his track record was impec-cable. was sitting in his Los Angeles office. “There was a tendency to be-lieve that everything they touched would be perfect. It was New Year’s Eve 1993. Based on the company’s success in the United States and Japan.

a man known as a tough negotiator with a knack for creating complex. which is a controlled and confined version of nature that becomes more satisfying and perfect than nature itself.e. this is because the. INTERNATIONAL MARKETING The Japanese Experience Eisner put the book down and picked up another file that contained an assessment of the incredible success of Tokyo Disneyland. for ex-ample. however. Euro Disney Problems In early February. more than are available in the entire city of Cannes. the area was to have 5. and vacation homes. Eisner turned to the financing plan. Key to the plan’s financial success was that Euro Disney would tightly control the design and build almost everything itself and then sell off the completed properties at a large profit. The attractions themselves would be similar to those found in the American parks. Subsequent phases of the plan also included office space that would rival the size of France’s largest office complex. forcing the park to shut its gates. apartments.200 hotel rooms. While the weather in France was not as warm as that in California or Florida. which had been prepared by chief financial officer (CFO) Gary Wilson. In commenting on the differences between Tokyo and France. the fake-ness of (Tokyo) Disneyland is not evident because (the Japanese) only had fantasy images of these things before” while “Europeans see the fakeness because they have their own real castles and many of the Disney characters come from European folk tales.” Other aspects of the American parks would also be transferred to France. Japan was starting to feel part of world culture. . Euro Disney SCA. the Japanese flag is never seen but variations on the Stars and Stripes appear throughout the park. fantasy America that it has become totally Japanese. At the same time. a theater with a 360-degree screen would feature a movie on European history. Tokyo Disneyland is a near replica of the American original. Robert Fitzpatrick. which was to provide tax losses and borrow capital at relatively low rates. a Tokyo University professor. he had commissioned a study of why the Japanese venture was doing so well. Disney was to manage the resort for large fees and royalties.” Eisner’s secretary announced that the consulting team had arrived and that the meeting would be held in his con-ference room. The first phase was a top-level assessment of the problems that they had 11. while owning 49 percent of the equity in the oper-ating company. A total of $3. a team of consultants returned to Eisner’s office with the first phase of their study com-pleted. would have attractions based on Frenchman Jules Verne’s science fiction. Euro Disney’s strategy was to transplant the American park. Tokyo Disneyland had been open about 11 years and had been drawing larger crowds than the U.5 billion in construction loans was raised from dozens of banks eager to finance the project. Most of the signs are in English. outdoes the American parks because it is probably cleaner due to the Japanese obsession with cleanliness. Euro Disney was just the cornerstone of a huge real estate development planned by Disney in the area. some say. half French and half American. Other plans showed shopping malls. largely to small individual European investors. The plan had set up a finance company to own the park and lease it back to an operating company. Given the size and complexity of the problems that they expected to find. La Defense.A. The park would have two official languages. felt “it would have been silly to take Mickey Mouse and try to do surgery to create a transmogrified hybrid. park is so san-itized and precise in how it depicts an unthreatening. as a result of its growing affluenc. just the way that Japanese want it to be. German.S.park from downtown Paris.625. citizen with extensive ties to France and the chairperson of Euro Disney. the study had been divided into three phases. Discoveryland. Disney held a 17 percent stake in the company. During that time period. Like the American parks. The Japanese Disneyland. Basically. Eisner found a study writ-ten by Masako Notoji.2 © Copy Right: Rai University 91 . Under the plan. and Frontier land. The number of rooms was expected to triple after a second theme park opened in the area. parks. The meeting started with Eisner explaining the assignment and the short time frames in which solu-tions had to be developed.” It has been compared to the Japanese garden. These include Main Street U. English and French. golf courses. Notoji’s research hypothesized that “. Located less than 10 miles from Tokyo. Tokyo Disney had been built in a climate similar to Euro Disney and the company had learned a lot about how to build and run a park in a climate that was colder and wetter than those of Florida and California.S. who studied the hold that Tokyo Disneyland has over Japanese people. Notoji’s report also noted that Tokyo Disneyland opened in 1983. a period in which the Japanese economy was especially strong. a multilingual staff would be on hand to assist Dutch. waiting areas and moving side-walks would be covered to protect visitors from wind. The opening of the Channel Tunnels in 1993 would make the trip from London 3 hours and 10 minutes. highly leveraged financing packages that placed the risk for many projects outside of Disney while keeping Much of the upside potential for the company Wilson had subsequently left Disney to become chief executive officer (CEO) of the parent company of Northwest Airlines. a U. with some modifications to increase their appeal to Europeans. in Paris. Seeking to determine if there were any paral-lels between the Japanese and European experiences. not the American dream. In part. rain. Italian. and cold. Ini-tially. In the file. . the park drew over 16 million visitors from throughout Asia in 1993. as well as Michael Jackson’s Captain EO 3-D movie. wine and other alco-holic beverages would not be served. Fitzpatrick’s greatest fear was that we will be too successful” and that too many people would come at peak times. The remaining shares were sold to the public. with only occasional Japanese. the United States was perceived as a model of an affluent society. Tokyo Disneyland became a symbol for many people of Japan’s entry into world culture. and Spanish visitors. Notoji wrote that the “Japanese who visit Tokyo Dis-neyland are enjoying their own Japanese dream.S.

Management. Three of the reasons that had been identified just after the park had opened were related to misunderstand-ings about European lifestyles. Robert Fitzpatrick. even though not all of the problems could be rectified. the average length of the visit in the United States was 4 days.uncovered in the initial month of the study.S. done. French labor issues 5. too. had made a number of critical mistakes including selecting the wrong local contractors. the report found. created tension and hostility among the management team. the length of the average stay was considerably different than at the U. That initial assumption totally failed to take into consideration the fact that “the French flatter themselves that they are more resistant to American cultural imperialism. spoke French and was married to a French woman. less critical problems. This proved incorrect. Competition from U.s stayed in Euro Disney an average of 2 days and 1 night. Disney parks by some American as well as French executives. he was distrusted 92 © Copy Right: Rai University 11. This problem. INTERNATIONAL MARKETING Cultural Differences/Marketing Issues The firm’s senior marketing strategist presented the second part of the ‘report.S. which focused on cultural and marketing differences between the U.S. parks. creating a spiraling effect that cut down on the number of French visitors. with large num-bers of people showing up for fairly substantial breakfasts. action plans. and Hollywood movies. Environmental and location factors 4. alcohol was not served. The six critical problem areas were 1. Management Hubris The first issue addressing the way in which Disney management had approached the development of the project and tactical errors made by members of the management team was the most sensitive. some of whom went bankrupt. an American. the consulting firm had brought in the head of their European practice. it was critical that Disney management understand the fundamental problems so that they could fix the problems at Euro Disney and not repeat the same mistakes again should they expand to other countries. how-ever. while Americans fa-vored short minivacations. arri ving early in the morning of the first day and checking out early the next day. and it had always worked in the past. particularly Tokyo Disneyland. was rectified after it was discovered. too. Frequently insensitive. Fortunately. In large part. without any recommendations as to what should be. Revenues from food were also significantly lower at Euro Disney compared with the other parks. Europeans were also accustomed to taking one or more longer vacations.S. and executives of the European banks that had made many of the construction loans as well as workers at the park.” The “her-metically scaled world of the theme park did not give the French an ability to put their own mark on the park. they were priced too high.2 . unfamiliar with the French con-struction industry. based in Paris. The initial arrogance of American management further demoralized the work-force. experi-ence and values with a management style that was brash. The first general manager. some of which had already been recti-fied. European parents were reluctant to do this. By comparison. Management hubris 2. The first phase of the analysis had uncovered a number of obvious problems. Euro-peans were far less interested in purchasing souvenirs. had been taken care of by re-ducing the prices at the fast-food restaurants. This error. in keeping with the family oriented values.” The Ameri-cans were overly ambitious and always sure that it would work because they were Disney. restraining the demand. Coke. as a result. Much of this arrogance. The decision not to serve alcohol at Euro Disney failed to account for the fact that alcohol is viewed as a normal part of daily life and a regular beverage with meals. The team felt that. Revenues from souvenir shop sales were also consid-erably below those in the other parks. parks. and often overbearing. In Japan.625. The second phase was to identify the most critical problems that needed to be addressed immediately and to develop. and in France: aca-demicians who have studied French and American culture. Because of the sensitivity of this subject. great value was placed on purchas-ing a souvenir from the park and giving the souvenir as a gift to friends and family upon one’s return home. the report continued. At the U. “The initial premise of Euro Disney in the mid-1980s was that there was no limit to the European public’s appetite for American imports given the success of Big Macs. Cultural differences 3. The purpose in identifying these problems. Fitzpatrick had already been replaced with a French native. was to be able to be sensitive and to identify other. both in the United States. This problem was corrected by changing the menus as well as providing expanded seating for breakfast through the expansion of cafeteria facilities. possibly more subtle cultural and marketing problems. The consultants’ report identified six critical major problem areas that they felt had contributed to the prob-lems. the consul-tants said. and develop recommended plans of action. While attendance was initially strong at the park. Disney was exporting the Am6rican management system.” the presentation started off. Unlike American parents who would take their chil-dren out of school for vacations. with peaks during the summer months when European children had school vacations and troughs during non-vacation pe-riods. Financing and the initial business plan 6. to analyze the problem and make the presentation. Extensive interviews had been conduced with members of the Disney manage-ment teams. European. While the park offered fast-food meals. this was because the American parks in Florida and California had multiple parks in the immediate areas while there was only one park at Euro Disney. The third phase was to identify the re-maining. Euro Disney quickly became known as a “cultural Chernobyl” and it cre-ated hostility from the French people. restaurants were planned to seat only a small number of breakfast guests. Attendance at the park was also highly seasonal. and European markets. The initial thinking was that Europeans did not generally eat a big breakfast and. By ‘starting off on this premise.

S. U. chose to walk rather than ride.” His presentation identified the following problem areas: 1. be rectified. management could not operate Euro Disney as efficiently and labor costs were significantly higher than the U. The plan was constructed in the mid-1980s. was also something that could not 11.625. INTERNATIONAL MARKETING French Labor Issues Next to speak was a European labor economist. shares were largely sold to individual investors with little tolerance for risk. identify the problems. as were facilities for bus drivers who would transport passengers to the park. Europeans. This provided U. The consultant concluded this portion of the presen-tation by saying that these were just a few examples of problems that resulted from a misunderstanding of the difference between the U. Disney executives disre-garded the initial advice of the French. The firm’s senior managing director spoke: “Financing and the assumptions of the initial business plan is the area that has created the greatest problems for the park. versus European labor laws. leaving the vehicles significantly underutilized. which was based on over leveraged finan-cial scenarios that depended on the office parks and hotels surrounding the park to payoff. the location east of Paris rather than to the west. In the initial design of the project. This presentation would be brief. Europeans. boats. 2. Again.In the initial design of the project.S. it was felt that the park should be built in the east. it was assumed that Europeans would be like Americans in terms of transportation around the park and from the hotels to the park attractions. the longer-term population growth would be in the east.2 © Copy Right: Rai University 93 . European investors did not under-stand these kinds of deals and propositions. community. and Japanese parks that had al-ready been identified. which stemmed from differences in-the United-States and Europe. as a result. a variety of trains. Al-though accommodations were made (including the covered sidewalks). and revaluation of European cur-rencies against the Environmental and Location Factors Next to speak was a team that included experts from an environmental planning firm. there were a number of other similar problems that needed to be iden-tified and fixed. he said. While not directly affecting revenue. This prob-lem. as a result. Most likely. In the United States. given the automobile ownership statistics in Europe. too. the fact that off-season visits had to be heavily discounted and promoted to groups to get even reasonable attendance still represented a major problem that needed to be corrected. They initially noted that given the location in middle to northern Europe and the fact that there were only about six months of temperate weather when it was truly pleas-ant to be outside. This. the capital as well as ongoing costs for this transportation were considerable. Parking facilities were built accordingly. Facilities for bus drivers to park their buses and rest were also inadequate. In addition to the plan being highly leveraged. In the United States. rather than the park itself. boats. In the United States. given the cyclicality and seasonality of the attendance at the parks. did not pro-vide this kind of flexibility and. Although it was possible to walk. workers were scheduled based on the day of the week and time of year. French labor laws. Disney did not understand the differences in U. since the problems that they identified were virtually impossible to correct at this stage in the project. which thought that even though most Parisians who would visit the park currently live west of the city. they noted. the capital as well as ongoing costs for this transportation were considerable. most Americans chose to ride. While not directly affecting revenue. most Americans chose to ride. or other groups. the ini-tial planning vastly underestimated the proportion of visi-tors who would arrive by bus as part of school. It was also assumed. and tramways carried visitors from the hotels to the park. A severe European recession. on the other hand.S. significant cost overruns in the construction of the park further increased the start-up costs. a variety of trains. Disney itself had imposed on arbitrary deadline of March 31 to develop a refinancing package with the creditor banks. chose to walk rather than ride. The second problem that they identified. There was little room for error in this plan. on the other hand. Although it was possible to walk. Whether through pricing changes or the de-velopment of other attractions or other marketing and pro-motional vehicles. It was reported that this was again related to overconfidence on the part of the initial planning team. Consequently. attendance in the off-peak months had to be increased. Financing and the Initial Business Plan The consulting team had hired a major global investment banking concern to review the plan. is the most important problem that needed to be addressed short term. its re-structuring is most critical to the ability of the venture to continue operating and become profitable and. The initial plan was highly optimistic and extraordi-narily complex. a period of high-flying free-market financing in the United States. Once again.S. was a problem that was initially solved. The initial plan was presented as financially low risk. the park was clearly sited in a location that did not encourage visitors on a year-round basis. however. that the majority of visitors would drive their own cars to Euro Disney and that a relatively small number of tourists would arrive by bus. management with a high degree of flexibility and economy in staffing the park to meet peak visitor demand. further putting pressure on de-veloping a credible and viable restructuring plan. A separate team was already at work to develop such a restructuring plan. it was assumed that Europeans would be like Americans in terms of transportation around the park and from the hotels to the park attractions. and tramways carried visitors from the hotels to the park. he said.S. could potentially be solved. making the achievement of the promised returns even more unlikely. a drop in the French real estate market. leaving the vehicles significantly underutilized. 3. parks. and develop a restructuring plan.

and Tokyo parks. As these problems were identified. faced with the problem of trying to achieve an unrealistic plan. WHAT to Do? The consultants’ phase-one report was concluded. Euro Disney management. equivalent to a top hotel room in Paris.S. What did Disney do wrong in its planning for Euro Disney? 2. What recommendations would you make to Disney to deal with the problems of Euro Disney? 3. park attendance and revenues per visitor needed to be increased while providing value and meeting Euro-peans’ expectations about the EURO Disney experience. the U. but there were other attractions surrounding Orlando and the weather was warm and sunny year around. food prices were also too high. espe-cially Florida.625. The meeting adjourned after the group had agreed that phase two of the consultants’ report. Among the mistakes were charging $42.French franc severely undercut all of the assumptions on which the plan was de-pending in order to succeed. Inside the park. In addition. teams had already been formed to develop potential solutions to the problems that could be solved. the long-term issues appeared to be in the area of marketing.S.2 . While it was critical to enable the park to remain open beyond the March 31 deadline. Disney Parks Finally. given the strengthening of the European currencies against the French franc and U. with a room costing $340. Hotel prices were set similarly. dollar.S. Not only did their currencies buy more. In par-ticular. Park provided the real experience compared with the European simulation. The investment bankers were already examining restructuring options. 4.S. it was often less expensive for Europeans to travel to the United States. identifying action plans for the most critical issues. had made se-rious errors in pricing. What lessons can we learn from Disney’s problems with Euro Disney? 94 © Copy Right: Rai University 11. INTERNATIONAL MARKETING Competition from U.25/day for admission to the park compared with a $30 daily fee for the U. would be presented on March 15. Discussion Questions 1.

Not only was the Euro-pean economy coming out of recession. labor-saving magnetic cards replaced meal vouchers. The rest of the start-up capital (nearly $3 billion) had been borrowed. while total revenue from the park and the five hotels fell 21 percent to FFr1. was quick to blame the poor performance of its French subsidiary on the adverse conditions in the European en-vironment. respectively. . To its credit. the mi-nority shareholders. the Euro Disney theme park suffered from the confluence of a number of environmental and internal problems. despite these measures and environmental changes. In all. was replaced by Philippe Bourguignon. the lowest since the park had opened. This meant that the parent company could make money even while Euro Disney was running at a loss.2 © Copy Right: Rai University 95 .625. a central purchasing department replaced the separate arrangements each hotel had had with its own suppliers. Walt Disney Company. The admission price charged to locals was lowered and the park’s stores had the number of lines of merchandise reduced from 30. The new chairman initiated a number of measures aimed at repositioning the theme park as a less expensive and more efficiently run resort. the Disney team had led itself to believe that it had perfected the recipe for success. pubic shareholders paid FFr72 and later. in reality these uncontrollable problems were exacerbated by the arrogant attitude and cultural naiveté of the American management. the interest charges for fiscal year (FY) 1993 came to around US$1 million per day. Atten-dance figures recorded for FY 1994 were only 8. Inspired by their record fi-nancial performance during the 1980s. This debt was largely due to the cost overruns incurred in building the park combined with a slump in the French property market. But in doing so.000.INTERNATIONAL MARKETING EURO DISNEY(B) The First Biennium: “Meltdown At The Cultural Chernobyl” In the 24 months since it first opened in 1992. equivalent to 8. were laid off in late 1993. As far back as the end of 1993. augured well for the tourist season of 1994. Euro Disney’s financial situation had deteriorated so much that the usually upbeat Michael Eisner. combined with the 50th anniversary of the Normandy Invasion. and the number of food items. who had earlier labeled Euro Disney “probably the best thing we ever built. the French-speaking American chairman of Euro Disney SCA. the public company that bears our name and rep-utation. Disney succeeded only in alienating its French stakeholders. Back in 1989. In contrast.400 to 2. most importantly. namely the creditor banks.” dis-tanced himself from the prodigal subsidiary by stating in his annual report to Walt Disney shareholders: We certainly are interested in aiding Euro Disney SCA. On the one hand. Yet. Euro Disney was adversely affected by an untimely Euro-pean recession and a strong French franc.8 million. and royalties of 5 percent and 10 percent on food and admis-sion. At the same time. of which they had contributed only US$170 million (for a 49 percent equity stake) while the public had paid $1 billion (for the remaining 51 percent). Indeed. that’s definitely no good at all. a Frenchman who had spent 10 years working in the United States.6 percent of the total workforce. which.” Why had the number of visitors fallen? Largely be-cause of circulating rumors that Euro Disney was about to be closed down. environmental conditions in the Eu-ropean market were improving. Also. the general public.16 billion. Statements such as these were no doubt intended to communicate Walt Disney’s reluctance to bear the brunt of the growing financial burden of the theme park! By dis-tancing itself from its subsidiary. Disney hoped to counter the widespread perception among Euro Disney’s other stakeholders that it had cut a “sweet deal” in structuring its relationship with the theme park. when Euro Disney SCA had been floated. when com-bined with the park’s high admission prices. . conspired to keep European tourists from visiting the park and from spending money once they got there. but the opening of the Channel Tunnel. Although the parent company. the financial performance of the park was greatly restrained by a mas-sive debt burden. I promise all shareholders of the Walt Disney company that we will take no action to endanger the health of Disney itself. when Euro Disney’s debt-reachedcFFr20 bil-lion. To counter the perception of management hubris. however. when the theme park had opened in 1992. In striving to apply this formula in the European market. staff in 950 adminis-trative posts. Also included in the initial deal was a management fee of 3 percent of gross revenues. this no-loss &deal for Walt Disney meant that banks would no longer lend money to the French subsidiary with-out a guaran- 11. In all. and. which had left Euro Disney with a number of hotels-each built with borrowed money-that it had originally hoped to sell once the park became operational. Finally. Euro Disney’s future was never darker. offered was slashed from 5. share prices had soared to FFr164.000 to 17. Moreover. Walt Disney had purchased 49 percent of the new company’s shares for FFr10 each. .000. Robert Fitzpatrick. As one French analyst observed with perspicacity and clarity: “They’re getting fewer visitors at a lower price. the labor unions. Disney responded proactively and deci-sively once its mistakes had been recognized. We will deal in good faith. Walt Disney actively pro-moted Europeans into the top management team. Walt Disney had arranged US$4 billion to fi-nance the park. an increasing “incentive man-agement fee” of 30 to 50 percent of pretax cash flow. In the Euro Disney hotels. However. analysts predicted that the profit per visitor to Euro Disney would actually decrease as attendance went up due to the proportion of fees that was to be repatriated to Walt Disney.

4 billion and lease them back on terms favorable to Euro Disney. 2 weeks ahead of schedule. while Euro Disney’s bond-holders were happy just to be excluded from the plan. Public shareholders 63 Creditor banks French government Bondholders 96 © Copy Right: Rai University 11. Euro Disney’s fate was sealed. not the least of which would be the impact on Disney’s already tar-nished corporate image in France. However. These secondary debt -market transactions reflected growing speculation that the debt would eventually be worth substantially more than what it was being purchased for. In the end. Curiously.95 billion. This reflected a saving to Euro Disney of FFr1. Finally. (Getting shareholder approval was a mere formality given the size of Walt Disney’s holdings. the parent com-pany did have the option of putting Euro Disney into bankruptcy. the operating company. Specifically. which was owned by a finance company that leased the park back to the operating company. In evaluating the efficacy of the rescue plan.4 billion in loans. Just prior to the March 31 deadline. made served to improve their tarnished cor-P9rate image in the French market. including the recently privatized Banque National de Paris.625.FFr2.000 jobs that were indirectly related to the park were eliminated. Disney agreed to purchase some of the park’s underuti-lized assets for FFr1. The second part of the plan called for a rights issue to raise funds. with debts now approaching FFr24 billion. Conversely.1 billion. Walt Dis-ney’s legal relationship was with Euro Disney SCA.4 billion) in low interest loans built road and rail links to the park. It would. Nevertheless. which was Euro Disney’s largest creditor with FFr4. On one side of the equation. Euro Disney was at its lowest point financially.” On the other side of the equation. shareholders were to be permitted to subscribe to seven new shares for every two shares held. or raised funds by some other means. Walt Disney wanted the banks to write down some of their debt or to convert the debt into equity. the creditor banks forgave 18 months of interest payments and postponed principal pay-ments for a period of 3 years. the plan contained two elements. however. Finally. a rescue plan was announced: In essence.4 billion) for ( subscribed shares FFr14 billion in loans Provided US$750 million ( FFr4.tee from the parent company. and sold Disneyland at low prices FFr4 billion of convertible bonds INTERNATIONAL MARKETING The Rescue Plan A number of issues affected the restructuring activities and influenced the bargaining power of the major stakeholders. a position from which it could dictate the terms of the restructuring. there was some speculation that the state-owned Caisse de Depots and Consignations. Although it appeared that Disney was not bargaining from a position of strength. despite the common interest in keeping Euro Disney afloat (Exhibit 1). there were a number of good reasons why Disney probably would not exercise this option. The question was. The banks were pleased with the deal because they did not end up owning or managing the park’s assets. called for “an asymmetrical sharing of the pain. although Michael Eisner had hinted at clos-ing the park.) Euro Disney’s share price immediately fell. a glimmer of hope was to be found across the Atlantic in the growing interest of U. Euro Disney’s top manage-ment had been put in place by Walt Disney-and. the con-cessions they. other stakeholders (such as the French government) also stood to lose if the theme park closed and the 40. and not with the beleaguered theme park itself. the plan comprised a deferment of interest and roy-alty payments. the banks argued that the park was Disney’s “creation and responsibility”-after all. the rights issue succeeded in raising a total of FFr5. (Disney had just a 17 percent stake in the finance company. Exhibit 1 Euro Disney’s Stakeholders and Their Financial Interests Walt Disney Co. Moreover. who were the winners? Although the plan called for the parent company to substantially increase its financial stake in Euro Disney-an additional US$750 million on top of the $350 million already spent-Walt Disney bene-fited from the plan because the fees it deferred would have been lost if the park had closed down. Total outlay of US$350 million ( . it is worth noting how the major stakeholders fared in the exercise. it is safe to assume that the labor unions and the French government also benefited from the bailout. Thus. who would pay how much and when? which had begun purchasing Euro Disney debt at around 60 percent of face value. might be compelled to lower its interest rates. However. some of the French banks. Finally. things had come to a head as Euro Disney simply ran out of cash. How-ever.1 billion): based on initial outlay of $170 million for 49% equity and the subsequent injection of emergency funds Initial outlay of US$1 billion -FFr6. “vulture” funds. which would be used to eliminate debt.S.9 billion. The rights issue was approved by a meeting of share-holders on 8 June 1994. which en-abled Euro Disney to reduce its debt burden by 23 percent to FFr16. Conversely. Similarly. First. and its stakeholders were compelled to come up with a rescue plan that either eliminated some of the crippling interest burden. Thus. First. Euro Disney’s 63 creditor banks and bondholders agreed that Walt Disney should carry much of the burden for the bailout. converted debt into equity. This meant that Disney would end up paying just under FFr3 billion for 49 percent of the offering. consequently. were concerned about the risk of sub-stantial losses and the consequent effect-on their credit rat-ings. Walt Disney provided emergency funds. Walt Disney said it would eliminate management fees (worth FFr450 million per year) and royalties on sales of tickets and mer-chandise for a period of 5 years. but also imposed a deadline for a restructuring of the subsidiary’s financial arrangements: Walt Disney had no intention of injecting further funds beyond the end of March 1994. still re-ceive an incentive fee based on Euro Disney profits. Euro Disney became an Achilles’ heel to the parent company giving Walt Disney its first quarterly net loss (in September 1993) since Michael Eisner had become chairman in 1984.2 . In this case. This issue worked by giving existing shareholders the right to purchase a number of shares at below-market prices (FFrl0) in the same proportion as their present equity stake. drafting a rescue plan that would’ satisfy all the stakeholders seemed problematic.) Neverthe-less. reflecting the dilative nature of the issue. reflecting its re-lationship with the French company.

Despite high barriers to entry. and within 2 months Euro Disney’s share price had dropped to just FFr7. Moreover. Some of these shares had been purchased from Walt Disney.1 billion 4.7 million visitors (Exhibit 4) but Euro Disney SCA also recorded its Exhibit 3 Admission Price Changes Adult price (FFr) Peak (1 April – 1 October) off –peak Old price 1995 price 250 195 Exhibit 4 Annual Attendance Figures (FY ending 30 September) 1993 1994 1995 9.” would receive non-financial rewards. However. Park industry is taken into considera-tion. Simultaneously.8 billion) 114 million) © Copy Right: Rai University 97 . events in the past few years had seen some commentators come to equate Euro Disney with Euro Disaster.The only clear losers in the rescue plan were the mi-nority shareholders.55. While U. Other changes included the decentralization of deci-sionmaking authority to “small world” up its consisting of 30 to 50 staff. shares were worth just FFr12. even-now appears-highly optimistic. Perhaps the most significant marketing change made was the renaming of the theme park itself. and to reflect the new lease on life that had been given to it by the rescue plan. On the day the rights issue was announced. (Euro Disney SCA would remain the name of the operating company. Managers of 11. things were about to get worse before they got better. such as Spain’s Port Ventura. announced his intention to pur-chase a significant equity stake in the company. new trainees were now re-quired to undergo 6 to 12 months of training.6 million shares.000 staff were employed on a seasonal basis. Not only did the park receive a record attendance of 10.8 million 10. However. The park’s total workforce had now been reduced to 12. However. Prince Al. the newly renamed park received some timely pub-licity when Michael Jackson and Lisa Marie Presley visited Disneyland Paris on their honeymoon. and by the end of the month. Much of this demand-driven investment activ-ity has been stimulated directly by the marketing appeals of Exhibit 5 Euro Disney profit and loss (FY Ending 30 September) Revenue 1993 1994 1995 4. Philippe Bourguignon estimated that the park needs 12. with each unit given responsibility for achiev-ing management targets and improving visitor satisfac-tion. the magnitude of the devaluation of Euro Disney’s market capitalization was minimized by the timely appearance of a new player in the market. im-plicit in this reprieve was the mandate to make Euro Disney a profitable company as soon as possible. or “cast members. the 37-year-old nephew of Saudi Arabia’s King Fahd. ne-gotiations with labor unions were under way to make staffing arrangements more flexible. in line with fluctuat-ing attendance patterns. new staff had received only one day of training. Previously.7 million 175 – 225 150 INTERNATIONAL MARKETING The Second Biennium: Euro Disney Gets A Reprieve The rescue plan effectively gave Euro Disney a 3. is likely to present a greater threat in the late 19908. as did the company’s share price. Euro Disney renamed the theme park “Disneyland Paris” to capitalize on its proximity to the French capital. This figure.8 billion Profit (Loss) (5. Although the figures for 1995 indicated that Euro Disney SCA had turned the corner. the world’s top tourist destination. Consequently. these autonomous units would received performance-based bonuses whereas other staff. many new parks are being built while established parks are investing in new attractions.9 billion 4. By mid--October. further efficiency measures were intro-duced.to 5-year reprieve from its interest and royalty charges. the prince had acquired 74. The name “Euro Disney” had been chosen in a period of pre-1992 unifica-tion hype. At the end of 1994 a 22 percent reduction in admission prices for the 1995 peak season was announced (Exhibit 3). Disney parks posed a competitive threat in the early 1990s. and Germany’s Warner Broth-ers Movie World. Although Disneyland Paris has become Europe’s number one paid tourist desti-nation.625. However. reflecting a 24. Euro Disney’s market capitalization dipped 8 percent to FFr34 per share. Despite the drop in its share price. of which 4. which opened in May 1995.2 first-ever profit (Exhibit 5). there is a clear need to increase attendance even further. much remained to be done in the next few years before the long-term viability of the venture could be established.000 from 17.5 million visitors per year to break even once roy-alty demands and interest payments resume in 1998.3 billion) (1.8 billion 8.) By a fortuitous twist of fate. which before 1995 seemed an impossible target.7 million convertible bonds.000. the appearance of a number of new theme parks in Europe.Waleed bin Talal bin Abdulaziz Al Saud.9. This meant that staff would now work longer hours on weekends and during the summer months when demand was greatest. whose stake in the company had conse-quently been reduced from 49 percent to 39 percent.S. Profit before exceptional items was only FFr2 million. In the spring of 1994.6 percent equity stake (acquired for around US$350 million). With 770 million shares now in the market-about four times the original number-Euro Dis-ney’s earnings per share inevitably fell. Such an attendance target seems even more unlikely when the rapidly rising level of competition within the Eu-ropean amusement. At the end of FY 1995 the cumulative effect of these changes in strategy and the rescue plan were evident. such as better promotion prospects. Also. it is sobering to note that the reported profit of FFr114 million is overstated be-cause of the deferred royalty and interest payments and Euro Disney’s buyback of 2. and Philippe Bourguignon and his staff wasted little time in enacting a revamped marketing strategy geared to this objective.

Across the Channel. Furthermore.” Indeed.Euro Disney. Disneyland Paris also competes indirectly with other en-tertainment-based attractions such as roller-coaster parks. INTERNATIONAL MARKETING The Third Biennium: What To Do? In seeking to increase the attendance of Disneyland Paris and ensure the sustained profitability of the company beyond 1998. an estimated 58 million people spent around US$1. and Sea World). the United Kingdom’s largest theme park. in Europe the amusement parks are scattered across the continent. In addition to the direct competition from parks such as Alton Towers. “We enjoyed 1993 on the back o f Disney’s promotional budget. which l)as led to the establishment o f a number o f tourist attractions such as Sega’s new Virtual World Center. What can be done to make better use of underuti-lized resources (such as the hotels) while increasing the profitability of well-patronized facilities? 98 © Copy Right: Rai University 11.625. with around 30 to 40 amusement parks. including Blackpool’s Pleasure Beach and Goteborg’s Liseberg. What branding-strategy decisions are relevant? 4.2 . where there typically are clusters of parks in close proxim-ity in places such as Orlando and Southern California (thus creating an incentive for visitors to stay a week or more in each locale). In 1993. How should the park differentiate itself from the competitive threat posed by the growing number of European amusement parks? 2. a new competitive threat is also emerging in the form of computerbased interactive enter-tainment. For example. located in London’s popular Trocadero complex. Alton Towers also enjoyed record atten-dances in 1995 based largely on the crowd-pulling power of two newly-opened rides. Nemesis and Energiser. 1. However. but it’s a tough and competitive business. Universal Stu-dios. a roller coaster ride based on Jules Verne’s book. What target marketing strategy should be pursued in the face of the changing competitive environment? 3. From the Earth to the Moon. Philippe Bourguignon must deal with a number of issues. West-ern Europe is fast coming to resemble the North American market where Disney is the dominant player among a crowd of competitors (including Six Flags. Competition in the amusement park industry is per-haps most evident in the introduction of new rides and at-tractions. while in Barcelona the Tussaud’s -owned Port Aventura promotes its Dragon Khan roller coaster as being the first to turn thrill seekers upside down eight times.5 billion on Europe’s theme parks. As the managing director o f the United Kingdom’s Thorpe Park observed. unlike North America. Euro Disney’s record-breaking attendance figures for 1995 were positively influenced by the opening of Space Mountain.

Coca-Cola. Caterpiller “Nothing changes more constantly than the past. the company that gets preferred styles and colors to market in the shortest time gains an edge over competitors. The virtues of frugality once preached by Gandhi remain uppermost in the minds of many. or useful data. In high-income countries. A few keystrokes can yield literally hundreds of articles. Second. An Integrated Approach to Information Collection Information. and a recent Gallup survey revealed that only 1 percent intended to buy an air conditioner in the near future.topics in order to make the most of modern information technology. they need a framework for information scanning and opportunity identification. The chapter concludes with a discussion of how to manage the marketing information collection system and the marketing research effort. is the material of executive action the global marketer is faced with a dual problem in acquiring the information needed for decision making. they should have a general understanding of the formal market research process.2 © Copy Right: Rai University 99 . The global marketer must know where to go to obtain information the subject areas that should be covered and the different ways that information can bi acquired acquired information must be processed in an efficient and useful way. only 2 percent of urban dwellers use deodorant.S. not scarcity. Even so. The technical term for the process of information acquisition is scanning. Obviously. For marketers hoping to achieve success in India and other emerging n1arkets. Lucuano Benetton. This chapter presents an information acquisition model for global marketing as well as an outline 0 the global n1arketing research process. “ Benetton’s market is. These topics are the focus of this chapter.LESSON 11: GLOBAL MARKETING INFORMATION SYSTEMS AND RESEARCH “To survive in this new globally competitive world. INTERNATIONAL MARKETING Benetton’s Information System In the fashion business. they should know how to manage the marketing information collection system and the marketing research effort. When researching any market. Once acquired. Current Issues in Global Marketing Research 5. marketers n1ust know where to go to obtain information. smokers refill disposable lighters. evolving rapidly” the company’s information system includes relational databases and a network for electronic data interchange. India’s 16 languages.625. information about buyer behavior and the overall business environment is vital to ef1ective managerial decision making. It is the marketer’s good fortune that. The in formation problem is superabundance. the largest marketing research company in India. very dynamic. Johnsonston The objective of the chapter is to make the student understand the importance of market research in international marketing. centuries-old cultural traditions and customs still prevail. First. and Web sites that offer a wealth of information about particular country markets. Likewise. Indians bathe twice daily. Despite the fact that summer temperatures frequently reach triple digits. Kellogg has had little luck winning converts to cold cereal. since the n1id-1990s. however. K. Overview of Global Marketing Information Systems 2. Finally. similar challenges are likely to present themselves wherever the marketer goes. However. founder of the Italian company that bears his name. they are finding that “India is different. Benetoon 11. and Unilever.” Gerald W. the global marketer is faced with the problem of information abundance an information scarcity. “Titoo” Ahuwalia is the president of ORG-MARG. As a result. marketers need to study several important . UNIT III ANALYZING AND TARGETING GLOBAL OPPORTUNITIES Despite increasing affluence. consumer behavior sometimes confounds Western expectations. the an10unt of information available far exceeds the absorptive capacity of an individual or an organization. but of what men believe happened.” India is the second most populous nation on earth. and the various analytical approaches that will yield important insights and understanding. as Titoo is fond of telling’ them. 200 dialects. and women recycle old sheets instead of spending money on sanitary napkins. a veritable cornucopia of market information has become available on the Internet. and low level of urbanization create special research challenges. for reasons of product and target. for the past that influences our lives does not consist of what happened. information must be processed in an efficient and effective way. Only l’ percent of households have air conditioners. Instead. there is a lack of information available on the market characteristics of less developed countries. Thus. Information technology is the glue for everything we do. Although advanced countries all over the world are in the middle of an information explosion.M. they need to understand the importance of information technology and marketing information systems as strategic assets. notes. the different ways information can be acquired. And. we had to modernize. Gillette. with a middle class comprised of more than 200 million people. research findings. Third. Sources of Market Information 3.” James Wogsland Vice Chairman. what subject areas to investigate and information to look for. in a country where food is believed to shape personality and mood and hot breakfasts are thought to be a source of energy. His client list reads like a “Who’s Who” of global companies: Avon Products. After the lesson the student would be able to appreciate the following: 1. For example. Formal Marketing Research 4.

data about each sales transaction are instantly transmitted via satellite to headquarters from cash registers at the company’s 7. General conditions Scanning Modes: Surveillance and Search Once the subject agenda has been determined. One is the limited extent to which executives are exposed to information that is not included in a clearly defined subject agenda. Reorders from any ciano Benetton is not satisfied. the categories in the framework are mutually exclusive Any kind of information encompassed by the framework can be correctly placed in one and only one category. it comprises all the information subject areas relevant to a company with global operations. Laws.” he says it’s not enough to know what we sold. This can be accomplished using surveillance and search. Availability of human. and physical resources.the information agenda of most companies. expectations of analysts. political. The company’s staff of field agents uses a tracking system to follow the movement of outbound merchandise. The general framework suggested in Table 6-1 consists of six broad information areas. A designer sitting at the computer can request any item from seasonal collections dating back several years. Investigation often involves seeking out books or articles in trade publications or searching the Internet on a particular topic or issue. Second. communication media availability and cost.000 stores around the world. store. the next step is the actual collection of information. This type of general exposure to information is known a_ viewing. designers had to personally visit the warehouse to review samples of clothing from previous seasons. $57 million distribution center. products. Benetton’s system helps cut inventory carrying costs and reduce the = number of slow selling items that must be marked down. and retrieve up to 12. the viewing mode generated only 13 percent of important external information. in a warehouse. regulations. Benetton’s MIS has slashed the amount of time required to design and ship Knitwear from 6 months to a matter of weeks. Markets Coverage Demand estimates. They want to know everything about the industry. He hopes to go beyond data processing and use information technology as a tool Zuccaro.2 . entry of a new player into a global industry. The basic elements of the external environmenteconomic. The framework satisfies two essential criteria. financial. the marketplace. Two factors contribute to the paucity of information generated by viewing. earnings.manager a rely heavily on inbound data generated at the point of purchase. whereas monitoring generated 60 percent. rulings concerning taxes.625. In the surveillance mode. global companies comes from surveillance as opposed to search. say. In Benetton’s state of the art. computer controlled robots sort. Search often involves investigation. the marketer engages in informal information gathering. This is known as monitoring. Global marketers may also develop a habit of watching news programs and commercials from around the world via satellite. nuggets of information. and consumers. the business. as shown in the table. a formally organized effort to acquire specific information for a specific purpose. Analysts sift through the data to identify treads. Most of Benetton’s Knitwear is produced as under “ grey goods” garments are dyed in batches in accordance with the fashion trends identified by the MIS. a relatively limited arid informal type of search. Resource Information 6. The other is the limited receptivity of the typical executive to information outside this agenda. Search may also consist of research. Before the MIS was installed.S. Browsing through newspapers and magazines and surfing the Internet are ways to unsafe exposure to information on a regular basis. Six Subject Agenda Categories For A Global Business Category 1. attractiveness of country currency.” 3.000 bar coded boxes of merchandise each day. which are conveyed to manufacturing. Every executive limits his or her exposure to information that will not have a Information Subject Agenda A starting point for a global MIS is a list of subjects about which information is desired. Search is characterized by the deliberate seeking out of specific information. interest rates. If a particular news story has special relevance for a company-for example. and financial factors-will undoubtedly-be. rumors.on. The search mode is characterized by more formal activity. legal and regulatory. One study found that nearly 75 percent of the information acquired by headquarters executives at ‘U. Foreign Exchange Balance of payments. Overall review of socio-cultural. business. This passion shows up in _he way they keep their ears and eyes tuned for clues. INTERNATIONAL MARKETING 4. and insights from other people’s experiences. dividends in both host countries and home country. Globally oriented marketers are constantly on the lookout for information about potential opportunities and threats in various parts of the world. or in transit. The MIS even helps the designer team work more efficiently. With the new system. social and cultural. Te system shows whether a particular item is in production. First. all clothing items are photographed and the images digitized and sorted on a laser disc connected to a personal computer. Corporate. consumer behaviour. technological environments. Competition 100 © Copy Right: Rai University 11. However. Taken as a whole. and it will be displayed on screen. Prescriptive Information 5. and market responsiveness. tracking the story as it develops. channels. and functional strategies and plans 2. information. Samsung into automobiles-marketers in the automobile and related industries and all competitors of Samsung will pay special attention. but we need to know what we should have sold and that we lost X dollars by not realizing our potential. The resulting subject agenda should be tailored to the specific needs and objectives of the company.

A good remedy for this situation is consultation with outside experts regarding the availability and quality of publications in relevant fields or subject areas. consultants. too few companies employ a formal system for coordinating scanning activities. We have a very well informed and able overseas group. suppliers. In some instances. a scanning system must ensure that the organization is viewing areas where developments that could be important to the company might occur. They know the local scene and they know our business. Over all. The local people have a double advantage. it is summarily missed. An overabundance of information has created a major problem for anyone attempting to stay abreast of key developments in multiple national markets. they are an excellent source. you can benefit from reading foreign publications. it is not uncommon for members of an entire management group to read a single publication covering a particular subject area despite the fact that several other excellent publications covering the same area may be available. However. research has shown that headquarters executives of global companies obtain as much as two thirds of the information they need from personal sources. effective system that will scan and digest published sources and technical journals in the headquarters country as well as all countries in which the company has operations or customers. Sometimes. one study found that three quarters of the information acquired from human sources is gained in face-to-face conversation. professional colleagues. the global organization is faced with the following needs: continue for the next few years.2 © Copy Right: Rai University 101 . • An efficient. Lopez had taken important documents and computer files when he moved to VW. Why? Some information is too sensitive to transmit in any other way. The best way to identify unnecessary duplication is to carry out an audit of reading activity by asking each person involved to list the publications he or she reads regularly. Although he was acquitted by a German court. When Ignacio Lopez de Arriortua. abstracting. • Daily scanning. acquaintances. They know what we are interested in learning. Innovations in information technology have increased the speed with which information is transmitted and simultaneously shortened the life of its usefulness to the company. Also. affiliates. Despite the advances in global information. This will 11. the resulting publicity was a source of embarrassment to Volkswagen. consumers. and prospective new employees. customers. A great deal of external information comes from executives based abroad in company. The Financial Times. The information issue exposes one of the key weaknesses of a domestic company: Although more attractive opportunities may be present outside existing areas of operation. its translation and electronic input are mostly manual. a company with only’ limited geographical operations may be at risk because internal sources abroad tend to scan only information about their own countries or region. This is rational: A person can absorb only a minute fraction of the data available to him or her Exposure to and retention of information stimuli must be selective. they will likely go unnoticed by inside sources in a domestic company because the scanning horizon tends to end at the home-country border. the creation of a full-time scanning unit with responsibility for guiding and stimulating the process of acquiring and disseminating strategic information may be advisable. Moreover. translating. The latter are particularly in1portant if they have worked for competitors. accepted a job as production chief with Volkswagen (VW). and because of their local knowledge they are able to effectively cover available information from all sources. particularly in developing countries’. Other important information sources are friends. and government officials. subsidiaries. Indeed. review the Web site recommendations throughout and at the end of the chapter. The Economist. Sources of Market Information Human Sources Although scanning is a vital source of information. executives are overwhelmed with documentary information. Therefore. This situation results in considerable duplication of effort. digesting. Often the scope of the group will be limited to a handful of publications to the exclusion of other worthwhile ones. head of purchasing at General Motors (GM). If the information they are viewing has not been generated by their company. Wherever you are located.high probability of being relevant to the job or-company. A consolidation of the lists will reveal the surveillance coverage. GM charged that Mr. a striking feature of the global corporation-and a major source of competitive strength-is the role executives abroad play in acquiring and disseminating information about the world environment. information-related ethical and legal issues arise when a person changes jobs. It is hard to overstate the importance of travel and contact for building rapport and personal relationships. highly placed government employees could find their careers. To be effective. it is vital that” the organization as a whole be receptive to -information not explicitly recognized as important. INTERNATIONAL MARKETING • Expanding information coverage to other regions of the World. and electronic input of information into a market intelligence system.625. In such cases. Nevertheless. for example. the most secure way of transmitting information is face-to-face rather than “in writing. Today. Similarly. The following is a typical comment of headquarters executives: Our principal sources are internal. and The Wall-Street Journal’s regional editions are good broad based sources. perhaps none is more apparent than the explosion of documentary and electronic information. Advances in technology have also placed new demands on the global firm in tenus of shrinking reaction times to acquired information. and branches. These executives are likely to have established communication with distributors. compromised if they are identified as information sources. Some organizations suffer from a variation of the NIH (not invented here) syndrome. Headquarters executives generally acknowledge that company executives overseas are the people who know best what is going on in their areas. then. Of all the changes in recent years affecting the availability of information. For example.

“There we were.thousand written reports. the chemical worked too well and ate through clothing. and the ever expanding universe of senders and receivers of information. documentary (published and private). It means seeing. market research companies. The so include the National Trade Data Base. The challenge is to develop search strategies and skills that ensure that you-get the information you need to better understand global markets. and the latter is available on the intranet or company passwordrestricted-access networks created by organizations for their own employees. There is no comparison between written reports and actually sitting down with someone and talking. Commenting on this point. cochairman of Unilever. which is available on CD-ROM from the Department of Commerce. One of the fast-growing industries in the world are companies that gather. The pictures may be still or full-motion video or animation. company that manufactures an electronic device for controlling corrosion had a similar experience. Following an initial burst of success. you must see people personally.out about an area. customers. news gathering organizations.” For example.” Unfortunately. universities. and competition. The information explosion is a Janus-faced monster.goes under the hood of a car or in the boiler room of a utility company. the executive managed to book several orders for the device. Massachusetts. The document may be combined with music. Face-to-face discussion also exposes highly significant forms of nonverbal ‘communication. When trying to determine a solution for the problem. The chief executive of a small U. The two broad categories of documentary information are published public information and unpublished private documents. which.Information that includes estimates of future developments or even appraisals of the significance of current happenings is often considered too uncertain to commit to writing. A document may be text only. Personal contact provides an occasion for executives to get together for a long enough time to permit communication in some depth. There is more and more information. Fitz Gerald asked the 30 Unilever executives how many did their own laundry. With the ever expanding bandwidth of transmission media. trying to figure out why customers wouldn’t buy our soap and we didn’t even know the first thing about how it was used. which is maintained by The Economist. We couldn’t understand why we needed a five-color label and a custom-made box for this device. a laundry powder with “an extra scrubbing chemical. Another on-line source is the EIU (Economist Intelligence Unit). No one responded. for one thing. the Internet and offer interactive information services feature bulletin boards where a great deal of information about various world markets is exchanged. security analysts. The former is available on the Internet. the Internet is clearly a revolutionary development in global marketing research. one executive said: People are reluctant to commit themselves in writing to highly “iffy” things. data assemblers and packagers. Japanese orders dropped off.625. feeling. smelling. and organize data from multiple sources. Direct Perception Direct sensory perception provides a vital background for the information that comes from human and documentary sources. export markets. which they then make available to clients.. A number of electronic resources have been developed in recent years. Direct perception gets all the senses involved. governments. Often. . Company recruits at Hindustan Lever are asked to spend six weeks living with a family in a remote Indian village. Companies. relates a story about the disastrous rollout in the United Kingdom of Persil Power. has developed PC software called “The World Trader” to help small firms find opportunities in. but the sheer quantity of information makes it more and more difficult to find what you are looking for. They are not cowards or overly cautious. or it may include pictures and music. Internet Sources The range and depth of information available on the Internet are vast and growing every day. analyze.S. The GateWaze company in Manchester. nongovernmental organizations. Similarly. and university faculty to mention just a few are all sources that can be accessed on-line. some things never change.that you are bound to be wrong in trying to predict the future. Yet.2 INTERNATIONAL MARKETING 102 © Copy Right: Rai University . An e-mail communication may be personal or impersonal. Niall Fitzgerald. The vast quantities of published documentary information that are available create a unique challenge: how to find the exact information you want. A personal meeting is worth a. or tasting for oneself to find out what is going on in a particular country rather than getting secondhand information by hearing or reading about a particular issue. After spending much time in Japan. The information explosion is an explosion in the availability of documentary information not only in print but increasingly online and on the Internet and the intra net for company-restricted information. hearing.” the 11. In addition. One executive described the value of face-to-face contact in these terms: If you really want to find . and direct perception. the Port Authority of New York developed a program called “Export to win to help small business owners learn about exporting. the executive was told the packaging was too plain. Some information is easily available from other sources but requires sensory experience to sink in. Documentary Sources One of the most important developments in global marketing research is the extraordinary expansion in the quantity and quality of documentary sources of information. and they prefer to not have their names associated with documents that will someday Look foolish. The great importance of face-to-face communication lies also in the dynamics of personal interaction. the ever increasing speed of processors that organize and transmit information. the background information or context one gets from observing a situation can help fill in the “big picture. The lesson he learned from this scenario was to never lose sight of your customer. they simply’ know . The Internet is a unique information source: It combines the three basic information source types: human. as discussed in-Chapter 3.

literally.S. The Japanese thought a coat hook was.” The vice president of marketing replied. that wine with meals is the norm in. the Lexus LS 400. distribution. The hook was redesigned. “What an opportunity! Everyone in this country is a potential customer!” The potential market for shoes was enormous in the eyes of the marketing executive. The importance of the global market to research firms has increased considerably in recent years. Each step is discussed below. analyzing data.or regional market provides good growth potential. a company must first estimate the market size.” Travel should be seen not only as a tool for management control of existing operations but also as a vital and indispensable tool in information scanning.625. is the project-specific. “a book is judged by the cover. To formally confirm his instinct. It is a truism of market research-that “a-problem well-defined is a problem half solved. “It’s like if you just bought a new washer-dryer.” Thus. such as Cuba. it was the first time the American understood that in Japan. the first two questions a marketer should ask are. a phase that is also known as research. France. A latent market is. or the rate of product purchase or consumption. As this story shows. Perhaps a competitor is making inroads in one or more important markets around the world. on the other hand. wine was “an affront” to local customers. There is no market for shoes in this country. The vice presidents of finance and marketing of a shoe company were traveling around the world to estimate the market potential for their products. “You can get five coat hangers on it.” says Brown. As Ron Brown. While waiting for the bullet train in Japan one day. This.1vlarketing research. over 70 percent of total revenue. Researchers may be able to pinpoint a weakness in the competitor’s product or identify an unserved market segment. Existing markets ate those in which client needs for secondary information are already being served. 11. systematic gathering of data in the search scanning mode. paintings.” One thing the team discovered was that the cost hooks in the first generation LS 400 were too small.) ACNielsen with a combination of wholly owned subsidiaries and affiliates has offices in 80 countries and customers in more than 100 countries. the level of demand. As described earlier. as in the story just recounted. developing a research plan. recalled. in turn. and even briefcases. Potential markets can be further subdivided into latent and incipient markets. based on the packaging. If your company is in need of a research company in another country. an undiscov- INTERNATIONAL MARKETING Formal Marketing Research Information is a critical ingredient in formulating and implementing a successful marketing strategy. price. and presenting the research findings. Toyota relied heavily on direct perception when redesigning its flagship luxury car.executive said. the company revamped its pack. depends in part on whether the market that is the focus of the research effort can be classified as existing or potential. In many countries. or. Design team members visited customers’ homes and took notes on preferences for such things as furniture. a company may wish to determine whether a particular country. But now it’s big enough that you wouldn’t want it out all the time. research totaled $1. “We might as well get back on the plane. for the 1995 model year. in essence.4 billion. A second research objective in existing markets may be assessment of the company’s overall competitiveness in terms of product appeal. The finance vice president said. Based on his experience of living in the country. The chief engineer of Lexus and a five-person team came to the United States to get firsthand direct observation data on the market. for hanging a coat. research is often undertaken after a problem or opportunity has presented itself. ACNielsen Company’s 1998 revenues from non-U.” As a result. and promotional coverage and effectiveness. Euro Disney had been experiencing marketing and financial difficulties. so it retracts. Lexus owners regularly hang their dry cleaning in the car. a MIS should produce a continuous flow of information. the Green Book published by the New York Chapter of the American tv1arketing Association lists hundreds of companies around the world. data about the size of existing markets-in terms of dollar volume and unit sales-are readily available. Disney had a no-alcohol policy but it wasn’t until a vice president who was sent to France to solve-the problem realized. Not serving. the executive’s local distributor purchased a cheap watch at the station and had it elegantly wrapped. Consumers were not flocking to the site and the consumers who visited were not very satisfied. and the Kenmore people called and said they wanted to bring a bunch of people out to watch you wash your clothes. (Marketing research companies are ranked in Table 6-2 according to revenues generated outside the United States. regardless of what situation sets the research effort in motion. They arrived in a very poor country and both immediately noticed that none of the local citizens were wearing shoes. he worked diligently to have the policy changed? As these examples show. some research would be required. In reality. One is to design and implement a study with in-house staff. Despite everything he had heard and read about the Japanese obsession with quality. There are two ways to conduct marketing research. One issue was the sale of alcohol with in the park. The other is to use an outside firm specializing in marketing research. collecting data. They stayed in luxury hotels to gain an understanding of the level of service Lexus customers demanded. “What information do I need?” and “Why do I need this information?” The research problem often involve assessing the nature of the market opportunity. In countries in which such data are not available. For example. The process of collecting data and converting it into useful information can be divided into five basic steps: identifying the research problem. after living in France for several months. Step 1: Identifying the Research Problem The following story illustrates the first step in the formal marketing research process. a ITS based product planning manager for Lexus. The distributor asked the American executive to guess the value of the watch.aging. cultural and language differences require firsthand visits to important markets to “get the lay of the land.2 © Copy Right: Rai University 103 . seeing to such details as ensuring that strips of tape used to seal the boxes were cut to precisely the same length.

Step 3: Collecting Data Are data available in company files. a great deal of potentially useful data already exists. and other information and communications products. Secondary Data INTERNATIONAL MARKETING A low-cost approach to marketing research and data collection begins with desk research. company or public libraries. Suppose a researcher asks. it will have little market response. in Drucker’s view. each of these products had become a huge success after people began to use them. The Cambridge. they reviewed the early days of mainframe computers. It contains information on 330 consumer products in 49 countries such as the market for alcohol beverages in China. Step 2: Developing a Research Plan After defining the problem to be studied or the question to be answered. the respondent most likely will answer. or other topic. political. and it is necessary to perform a cost benefit analysis before proceeding further. on-line databases. the main research challenge is to understand the extent to which competition fully meets customer needs. the prospects of market acceptance were low. The problem.000 reports and studies covering 90 industries. In a latent market.2 104 © Copy Right: Rai University . photocopy machines. if a company can predict a country’s future rate of income growth. England. existing demand. Information Group publishes ‘Findex. during the planning step. With latent markets. it depends on the prime mover advantage-a company’s ability to uncover the opportunity and launch a marketing program that taps the latent demand. or sociocultural trend continues. Sometimes traditional marketing research is not an effective means for doing this. the marketer must address a new set of questions. discussed the next section. a realistic estimate of a formal study may reveal that the cost to perform research is simply too high. In England. a directory of more than 13. The cost of this report is contingent upon the various modules that are purchased and costs several thousands of dollars. A formal market study can cost hundreds of thousands of dollars and take many months to complete with no guarantee that the same conditions are still relevant. As per capita income rises in a country. initial success is not based on a company’s competitiveness. etc. As. technological. This can be illustrated by the impact of rising income on demand for automobiles and other expensive consumer durables. demand is zero before the product is offered.500 and enables you to send. advertisement.” Drucker explains that the reason Japanese companies are-the leading sellers of fax machines today is that their understanding of the market was not based on survey research. It is a market in which demand would materialize if an appropriate product were made available.ered segment. The Economist Intelligence Unit’s EIU Country Data is another valuable source of information both in print and on-line. It is available in many university libraries. a library. “Would you buy a telephone accessory that costs upward of $1. cellular telephones.S. Syndicated studies published by research companies are another source of secondary data and information. methodologies. Customs data can be. for example. and time parameter are all spelled out. Therefore. Personal files. the Coca-Cola Company convened focus groups in Japan. In the case of existing markets. and trade associations are just a few of the data sources that can be tapped with minimal effort and often at no cost. for $1 a page. Another on-line example is the Global Market Information Database (GMID). “No. Coke was particularly anxious to counteract competition from privatelabel colas in key -markets. government records. the demand for automobiles will also rise. Data from these sources already exist. any event. A focus group is a group interview led by a trained moderator who facilitates discussion of a product concept. What is this information worth to me in dollars (or yen. Decision. Such data are known as secondary data because they were not gathered for the specific. In. Even when more information is needed to ensure a high-quality. or on-line? When is the information needed? Marketers must address these issues as they proceed to the-data collection step of the research. budgets. After the trends have had a chance to unfold. Primary Data and Survey Research When data are not available through published statistics or studies. direct collection is necessary. major study can result in significant savings.)? What will we gain by collecting these data? What would be the cost of not getting the data that could be converted into useful information? Research requires the investment of both money and managerial time. industry or trade journals. Yet. the Japanese realized that. the incipient demand will become latent. Only when the plan is completed should the next step be undertaken. and the United States to explore potential consumer reaction to a prototype 12 ounce contoured aluminum soft-drink can. utilizing such data instead of commissioning a. Table 6-4 shows how specific free data based on U. Instead. This realization prompted the Japanese to focus on the market for the benefits provided by fax machines rather than the market for the machines themselves. judging only by the initial economics of buying and using these new products. Personal interviews with individuals or groups allow researchers to ask “why” and then explore answers. Rather. As Peter Drucker has pointed out. For example. By looking at the success of courier services such as Federal Express. Using readily available data saves both money and time. If a company offers a product to meet incipient demand before the trends have taken root. the fax machine market already existed. and later. it can also predict the growth rate of its automobile market. the same letter the post office delivers for 25 cents?” On the basis of economics alone. the failure of American companies to successfully commercialize fax machines-an American innovation-can be traced to research that indicated no potential demand for such a product. social trend. The Japanese realized that. Simsbury’s store-brand cola had an 18 percent market share9 and Virgin 11.625. and focus groups are some of the tools used to collect primary market data. in essence. Primary data pertain to the particular problem identified in step 1. Survey research. stems from the typical survey question for a product targeted at a latent market. Incipient demand is demand that will emerge if a particular economic. interviews. a company may pursue the same course of action no matter what the research reveals. project at hand. In some instances.

It is easy for respondents to answer and for the interviewer to record. when per capita incomes are low. Market Estimation by Analogy Estimating market size with available data presents challenging analytic tasks. even if it is carefully translated. among other things. the survey respondents were people who already had traveled to France on pleasure trips in the previous two years-a fact that likely biased the result.. covered the personality of the French people. At the early stages of growth in a country. and snowball. as is frequently the case in both less developed and industrialized countries. service industries rise to overtake manufacturing in importance. However. young people tend to defer to elders. respondents tend to overstate their enthusiasm and Asians tend to show diffidence . The two basic sampling procedures are probability sampling and nonprobability sampling. production patterns are helpful in assessing market opportunities. however. Case Corporation recently needed input from farmers about cab design on a new generation of tractors. An important survey issue in global marketing is potential bias due to the cultural background of the persons designing the questionnaire. For example. Survey research generally involves administering a questionnaire by mail. cultural differences that must be considered when using focus groups. smaller proportions of total income are spent on food. qualitative data (“Why would you buy?”). quota. In Asia. the relative importance of these industries declines as heavy industry begins to develop. which states that as incomes rise. and lower-level executives to higher-level executives when they are in the same group. the net conclusions that may be 11. judgmental. 2. The first method. The report ostensibly showed. and Australia. Survey research often involves obtaining data from customers or some other designated group by means of a questionnaire. Europe. In some instances. a survey designed and administered in the United States may be inappropriate in non-Western cultures. As incomes continue to rise. One resourceful technique is estimation by analogy.Cola was a major competitor. increasing relatively faster than increases in income. manufacturing centers on such necessities as food and beverages. For example.12 Sometimes bias is introduced when a survey is sponsored by a company that has a financial stake in the outcome and plans to publicize the results. As incomes rise. Demand for durable consumer goods such as furniture and appliances tends to be income elastic. The visiting fanners were also asked to examine tractors made by Case’s competitors and evaluate them on more than 100 different -design elements. Analyzing Results Because there are numerous analysis techniques and different assumptions may be used.625. resourceful techniques are required. A good questionnaire has three main characteristics: 1. It is simple. Cluster Analysis Sampling is the selection of a subset or group “from a population that is representative of the entire population. the method of selection must be determined. each unit chosen has a known chance of being included in the sample. Cluster analysis is well suited to global marketing research because similarities and differences can be established between local. When data are unavailable. There are. Case markets tractors in North America. that. There are two ways to use this technique. cross-sectional comparisons. Working in conjunction with an Iowa-based marketing research company. contrary to a long-standing stereotype. the sample size must be determined. and other forms of light industry. the chance that any unit will be included in the sample is unknown. national. Surveys can be designed to generate quantitative data (“How often would you buy?”). This is the corollary of Engel’s law. Additionally. Case personnel from France and Germany were on hand to assist as interpreters. It keeps the interview to the point and obtains desired information. The four types of no probability sampling are: convenience. and-multistage. by telephone. American Express joined with the French tourist bureau in producing a study that. Stated differently. Four considerations for using a -probability sample are: the target population must be specified. trends in manufacturing production indicate potential markets for companies that supply manufacturing inputs. Step 4: Analyzing Research Data Demand Pattern Analysis INTERNATIONAL MARKETING Industrial growth patterns provide an insight into market demand. Income elasticity studies of consumer products show that necessities such as food and clothing are characterized by inelastic demand. Many good marketing research textbooks provide details on questionnaire design and administration. One way is to make cross-sectional comparisons. 3. There are five types of probability sampling: random. Income Elasticity Measurements Income elasticity describes the relationship between demand for a good and changes in income. Sampling sample.2 © Copy Right: Rai University 105 .example. -In a-non-probability The objective of cluster analysis is to group variables into clusters that maximize within group similarities and betweengroup differences. For. -cluster. and non-responses must be addressed. the French are not “unfriendly” to foreigners. expenditures on products in these categories increase but at a slower percentage rate than do increases in income. and the other is to displace a time series in time. but the prototypes it had developed were too expensive and fragile to ship. or in person. In a probability sample. and regional markets of the world. Because they generally reveal consumption patterns. product characteristics dictate a particular country location for primary data collection. stratified_systematic. Case invited 40 farmers to an engineering facility near Chicago for interviews and reactions to instrument and control mockups. textiles. or both. amounts simply to positing the assumption that there is an analogy between the relationship of a factor and demand for a particular product or commodity in two countries. In Latin America.

Nestle created chicory flavored sunrise especially for the Indian market. Even with standard data-gathering techniques. taste is an issue facing America tobaccos. each of which has unique characteristics that must be recognized in analysis. the government taxes make up 70 percent of the retail price of a single pack. As noted earlier. Sixty percent of Indian men smoke. the global researcher must devise techniques and methods that keep expenditures in line with the market’s profit potentially smaller markets. The relatively low profit potential in smaller markets permits only a modest marketing research expenditure. the results-are often well worth the effort as the examples in the box “Market Research in Developing Countries” demonstrate. become aware of potential problems. Goskomstat. which is hand rolled with a leaf outer wrapper rather than paper.000 tons to its consumption statistics in “an attempt to encourage foreign investors to install domestic.50. It may also be necessary to use inexpensive survey research that sacrifices some elegance or statistical rigor to achieve results within the constraints of the smaller marketing research budget. for many countries. while the typical American smoke uses oriental and burley blends.achieving the greatest marginal effectiveness for their marketing expenditures and can adjust expenditures accordingly. economist at the Tobacco Merchants Association (TMA). The tobacco industry is also learning about India. Benetton’s stores around the world are linked by computer. Real GDP may be 40 percent higher than the official numbers’ because much of the economic activity in Russia’s transitional economy is “off the books due to high taxes and confusing -laws. the global market researcher must analyze many national markets. Nestle has responded by keeping prices down more than half of the predicts it sells in India cost less than 25 rupees about 70 cents. As a result.” Current Issues in Global Marketing Research Marketers engaged in global research face special problems and conditions that differentiate their task from that of the domestic market researcher.15although market research in developing’ countries may have its challenges. In some cases.” Although western brands enjoy high levels of awareness. the availability of data is limited. definitions differ around the world. Another frequently encountered problem in developing countries is that data may be inflated or deflated. When an item is sold. Therefore. for example. Second. As the data provided by a corporate information system and marketing research become increasingly available on a worldwide basis. or electronically via videotape. The marketing information system is an integral part of the broader management information system. classifies television set purchases as expenditures for “recreation and entertainment. the report may end up on the shelf where it will gather dust and serve as a reminder of wasted time and money. INTERNATIONAL MARKETING learned that the 20 million wealthy households in its core target market exhibit a value orientation traditionally associated with mass markets. its color is noted. The data collected make it possible for 106 © Copy Right: Rai University 11. and develop marketing plans. generates mountains of misleading statistics. it must relate clearly to the problem or opportunity identified in step 1. “ many companies. these differences are minor. Nestle also caters to the Indian preference for local brands. As Darry Jayson.” Indian smokers perceive U. data from tax receipts are used in conjunction with data from household surveys and production sources.S. whereas in the United Kingdom. although Nescafe is the company’s flagship global coffee brand in may countries. First. local and international. premium European brands such as Dunhgill cost $4 per pack. Germany. I think it is very difficult to change the smoking habits of the Indians. For example. are hoping that these bidi-smokers move up to cigarettes as India becomes more affluent. although many prefer the native bidi. Whether the report is presented in written form. It successfully positioned its maggi brand noodles as a between meal snack food rather than pasta meal item. Many managers are uncomfortable with research jargon and complex quantitative analysis. instead of analyzing a single national market. furnishings. c Middle Eastern country deliberately revised its balance of trade in a chemical production Marketing Research in Developing Countries Nestle demonstrates how understanding the market can lead to success. Nestle managers have also by adding 1. As such. Managers can then decide where they are. Otherwise. The TMA’s Jayson says. For example. they are quite significant. In Russia. Marketing Information System A Marketing Information System (MIS) is an integrated network of information designed to provide marketing managers with relevant and useful information at the right time and place for planning. and control. for example. orally.625. and household equipment” classification in the United States. For example. either inadvertently or for political expediency. the estimates of on-line shopping revenue for 1999 varied from $3. noted recently. in others. the MIS helps management identify opportunities. Another problem is that the comparability of international statistics varies greatly. the state agency that measures the economy. whereas Indian brands from Indian Tobacco company and other local manufactures sell for 50 l to $1. it becomes possible to analyze marketing expenditure effectiveness across national boundaries. decision making. the small markets around the world pose a special problem for the researcher.drawn from market research may vary significantly.2 .9 billion by the Direct Marketing Association to $36 billion by the Boston Consulting Group. “An absence of standard data-gathering techniques contributes to the problem. Results should be clearly stated and -provide a basis for managerial action. Two companies studying the same country or market segment can and often do reach different decisions accordingly. consumer expenditures are-estimated largely on the basis of turnover tax receipts. It may take up to 20 years to bring about the change.” whereas the same expenditure falls into the “furniture. there is pressure-on the researcher to discover economic and demographic relationships that permit estimates of demand based on a minimum of information. production facilities. In Germany. Step 5: Presenting The Findings The report based on the marketing research must be useful to managers as input to the decision-making process. cigarettes as roasted and harsh.

System design should be the next major consideration. flexibility is a necessity.2 unqualified persons from gaining access to the system. makes each employee practically indispensable since no one knows how to find a document that has been filed by someone else. whether large or small and whether domestic or global. An IMIS should be time independent by providing around-the-clock services. and analyzing marketing data. Each employee may have his or her own unique ad disorganized system for filing documents and information. The unindexed filing system. whenever possible. For the MIS to be effective and efficient. such as some European countries and Japan. Yet no one should assume that the computer is a panacea for all system problems. The MIS should also be systematic and selfperpetuating. flexible. the implementation of an IMIS must conform to local laws. Sweden. the postcode usually precedes the town on a single line. will never-perform satisfactorily. With modern technology and the availability of affordable computers. System design transforms the various information requirements into one or more plans that clearly specify the procedures and programs in obtaining. in France. certain characteristics are universal in the sense that all information systems. and other European countries. are still struggling with the automation of their information systems. the system should be user-oriented. and integration. Advanced nations.Benetton to determine the shade and amount of fabric to be dyed each day. The German language may require up to one-third more characters than the English-language equivalent. reliable. A poorly designed system. should possess them. integrated. Regarding field sizes. But in France. In France and the United Kingdom. Naturally. C. it should possess certain characteristics. should enable marketers to efficiently access and compare data on their . when it is needed. it may not be feasible to satisfy all kinds of information needs. for example. The chosen system is installed and checked to make certain that it functions as planned. and controllable. In Britain. given the number of users. the postcode should follow the country name. Belgium. especially if flaws are designed into the MIS. The relevant parties must be contactedto—determine the kinds of information they need. The databases. it seems quite worthwhile for an international firm to install a computer based information system. the right-hand side is the norm. methods of data collection and maintenance are still prevalent. certain kinds of information need to be standardized. The benefit of the information provided must be compared with the cost of obtaining and maintaining it. enabling the firm to respond to color trends very quickly. U. In this way.3 million when a consultant was able to obtain an electronics fund transfer code and use it to deposit money into his Swiss bank account. In many offices.particular information need. Although many firms’ systems are computerized. scores of desks are crammed together in the same room. A. System analysis involves the investigation of all users’ information needs. New employees inherit these filing and accounting systems and modify their to fit their needs. Development involves the three steps of system analysis. Nielsen is the world’s largest consumer market research company with operations in twenty-seven countries. Alternative or competing plans are developed and compared. comprehensive. evaluated. Germany and Italy. Because information is not free. the house number precedes the street name. Marketing and environmental information should be routinely received. lost $10. it is possible for a company to set up and utilize a manual system that can later be computerized if desired.own products and those of their competitors. Security Pacific Bank. management can make certain that the system serves the needs of all users properly while preventing 11. Nielsen Europe has synchronized its continent wide reporting periods and implemented pan-European databases. should be built into the software and system. it is the opposite.be accommodated. the window should go on the left-hand side in the case of Britain. and Germany. INTERNATIONAL MARKETING Database and Some Format Considerations A firm’s database should be flexible enough to accommodate each country’s preferred style in maintaining names and addresses. whether computerized or not. countries. Even after implementation. and Ireland. According to Sweeney and Boswell. Such problems are not just confined to LDCs. design: and implementation. the postcode follows the town or city. an international marketing information system (IMIS) needs to satisfy additional criteria in order to ensure that the system can effectively serve a company’s international marketing strategy. standardization/uniformity. For the MIS to achieve its desired purpose. Some of these criteria are time independence. Italy. Concerning addresses. legal compatibility. expandable. and the most suitable one is ultimately selected. the system should continue to be monitored and audited. firms are also not immune to this problem. efficient. Only when the benefit is greater than the cost can a. cost-effective. the system must be carefully designed and developed. Regarding address windows. and their comments should be evaluated to ensure the smooth operation of the system.S. and the suitable format through which the information is made available. “dark age’. as defined by international standards. the Netherlands. Cultural knowledge and linguistic capability. an IMIS must be designed to allow data integration. To assure uniformity. In Germany. Finally.625. The last step comprises system implementation. and locations involved. In spite of computer and other advanced technologies. In many parts of the world. But unlike a domestic MIS. location independence. a knowledge and application of modern management systems is nonexistent. Yet some degree of flexibility is required as well since a good information system should be useroriented. flexibility. timely. Being location independent means that the system must be capable of allowing submission and usage of data at the various strategic points globally. As implied above. cultural and linguistic compatibility. Both those who operate the system and those who use it must be trained. and continuously updated. a long-honored custom. recording. If the country name is omitted. Although many key influencing © Copy Right: Rai University 107 . There is often a misconception that an MIS must be-automated or computerized.

The responsibility of this subsystem is 10 track environmental changes or trends. In England. and so. retail trade structure. syndicated research services. and from publications about technology. Similarly. government agencies. respectively. The MIS should be designed to do more than data collection and maintenance. heavy fines are levied. The efforts yielded names. The questionnaire is a self mailer that asks a customer’s name. grocery stores’ distributors began to focus on market leaders Bledina and Nestle which have 50 percent and 25 percent of the market. The magazines feature the full range of Levi’s products on a larger poster and such assorted features as film and music profiles sprinkled among full-page fashion photos of young people wearing Levi’s items. To capture market share. law requires marketers to notify customers that a file is being created on them and to explain why a database record has been set up. concerned with citizens’ privacy. the country’s data-protection laws may be the most restrictive in the European Union. In general. The stable birth rate has forced marketers to try to increase sales at the expense of the competitors. children switch from jarred baby foods to cereals or other foods. The activities of this subsystem have already been discussed extensively. Furthermore. literature about a program through which young mothers earned items from a gift catalog). otherwise. It is a waste of money to use direct mail to reach the thirty-plus age group. she does not change it often Keep it Private Because there is no pan-European law. Germany prohibits virtually all activities regarding collecting. Levi’s has two free magazines: Tab and Corner. Levi’s/Benelux has maintained a retail database of fourteen:’ to twenty-three year olds in the three Benelux countries. Since most young people ignore TV spots. and telephone numbers as well as children’s ages for follow-up contacts. The direct mail packages provide nutritional information as well as price-off and two-for-one coupons for the product. This subsystem collects data from salespersons. hospital samplings. address. age. The MIS thus requires an ana1ytical component that is responsible for conceptually and statistically analyzing the data. For externally generated information. Computer users must state how personal information was obtained and how it will be used. In Germany. The database relies exclusively on company owned stores and Comer department via a questionnaire.000 babies are born in France each year. and materials placed in waiting rooms (e. magazine. inventory levels. Not receiving much direct mail. and processing personal data. it is illegal to collect data having to do-directly or indirectly-with membership of trade unions. The consumer service department receives consumers’ praises and complaints. One of these is the marketing research subsystem. ) INTERNATIONAL MARKETING DATABASE MARKETING Some 750. Great Britain’s Direct Marketing Association Code of Practice requires list owners to warrant that “the data have been fairly and lawfully obtained and all private individuals whose data are included have been given an opportunity to object to the use of their data by persons other than the list owner and that the data of those who have objected have either have been deleted from or so marked in the list”. British residents have the right to see personal data about themselves.of these types of internally generated information should be kept and made available to all concerned and affected parties. promotional costs. Once she chooses a brand. direct mail is the best way to reach Levi’s target groups.625. they will be automatically cut off. In France. All. the legal and political climate. thus edging out Gerber. communication. The other subsystem is the marketing intelligence or environmental scanning subsystem.g. It should go beyond data collection by adding value to the data so that the information will be of most use to users. and erasure of personal data are not allowed unless expressly permitted by the data-protection act. This component may even go a step further by offering conclusions and recommendations based on the analysis of the data. Consumers must be given a “reasonable opportunity” to get their names off mailing list. Quebec’s privacy legislation restricts the activities of direct marketers who target the French-speaking province.on. and competitor’s activities. After the first eighteen months. Unfortunately {or these young people. In England data users are required by the Data Protection Act to register with the Office of Data Protection Registrar. The internal reporting subsystem is vital to the system-because a company handles a great deal of information on a daily basis. print advertisements. marketing research. young people are happy to receive Levi’s. The marketing department has sales reports. and TV advertising will continue to have distinct local character. have laws that restrict free flow of information. The accounting department routinely generates and collects such information as sales orders. It is important to influence a mother’s brand selection at the outset. economic conditions. Gerber began to build a database of young mothers through mailings to rented lists. Data processing is prohibited unless a person has given his or her written consent. The 108 © Copy Right: Rai University 11. shipments. The MIS consists of several subsystems: internal reporting. when they reach age thirty. the uniform methods allow for a quick examination of market situations across the entire continent. In the early 1990’s.factors such as language. storing. all storage. data collection laws are similar to those in France. consumption habits. The implementation of the MIS must conform to local laws. addresses. and marketing intelligence. each country’s law must be analyzed. distributors. Many countries. maternityroom videos. and gender. social and cultural norms.2 .000 young French mothers whose infants have reached eighteen months. as a consequence of the Nazis’ use of personal information to identify enemies. Gerber has used the database to mail special packets of natural instant cereals to some 150. the MIS should consist of two subsystems.

The economic dimension of information gathering is more familiar. is which world markets to enter. and better research and decisions on the marketing mix can result. international trade barriers.2 © Copy Right: Rai University 109 . and religion play in shaping national goals? 2. the educational sector. per capita income levels and growth rates. government requirements. the physical distribution infrastructure. stage of the business cycle. balance of trade and balance of payments. Information for Marketing Decisions Marketing Decision Intelligence Needed The fact of being in a global market means that the firm must seek information to help it to understand the country and regional environment. and the foreign trade sector? What are its industrial and technology policies for sunrise or burgeoning industries and its social policy (for example. licensing. it must find a way of ranking them according to their attractiveness. population demographics. Go international or remain a domestic marketer 2. company experience there and in other markets. A ranking of world markets according to market potential. How to enter target markets 4. in view of local and international competition and compared to domestic opportunities. Which markets to enter Assessment of global market demand and firm’s potential share in it. competitive practice. then. It includes obtaining data on economic performance. This requires an investigation of their market potential and the local competitive situation. Marketing Environment Research should emphasize gathering information about the country and region of interest and evaluating comparative information across countries. The firm must assess the global competitors that it will face in order to compete better with them. productivity. standard marketing questions arise. The information needed to make these decisions is frequently provided by marketing research. does the nation seek to reduce import dependence. educational attainment. as well as obstacles to entry and marketing of goods and services as well-as the long-term profit potential. These decisions can be further broken down until eventually a very specific local issue is reached-the kind of package and label that should be used for the firm’s floor wax in the Philippines. its fiscal. 3. such as product decisions. distribution channels. local competition. Once the firm has identified desirable target markets. For each market: buyer behaviour. Political structure and ideology : What does the political leadership of the country seek? What roles do major institutions such as business. and political stability. laws concerning pricing and promotion. and controls over managerial and marketing autonomy. The political dimension of information gathering includes data on the following: 1. monetary. as well as the consumer and the product. labor costs and capital availability. and the political situation. for example. capacity utilization. and is developing national champions in industries considered critical? 3. National objectives : What are the country’s goals for the defense sector. it must decide how to serve those markets-by exporting. Government regulation is another area for market research. pricing decisions. or local production. or channel decisions. for example. particularly with regard to product and safety standards. Once a decision has been made to market in a particular country. Size of market. Marketing infrastructure is also of interest. labor. inflation rates. covering indicators such as GNP. local competition. including the structure of wholesaling and retailing. Since the firm cannot usually sell to all world markets. and income distribution. All of these help determine the attractiveness of the market. savings and investment. how do they affect income distribution and conspicuous consumption)? Is autonomy a goal. promotional media and practice. transport costs. Does the government implement industrial policies that benefit domestic companies and industries at the expense of foreign firms? 1. and the extent of development. It of consumer protection. Both political and economic information are relevant. age distribution. employment levels. How to market in target markets The Information Provided by Marketing Research What information should international marketing research provide? Obtaining information about consumer behavior and product-related information come to mind as typical marketing research objectives. 11. 4. Only then does information about the industry and the product make sense. barriers to entry (affecting foreign companies and their products). public health.INTERNATIONAL MARKETING LESSON 12: INTERNATIONAL MARKETING INTELLIGENCE What Information Is Needed? We assume that the firm has already decided to go international.625. but the objectives of international marketing research should be broader. and investment policy. Its next decision.

Competition Assessing foreign competitors involves developing additional levels of understanding since foreign competitors may have distinct and different objectives that shape their strategy and tactics. They may also possess hidden resources and strengths that are culture specific and not apparent to the outside firm. For example, close family and other ties may exist between a competitor’s top management and influential individuals in government and the political arena. In conducting such assessment, the firm must first investigate the assumptions it holds about its foreign competitors regarding their objectives and capabilities; then it can assess potential strategies and make plans in terms of which new markets to enter, what modes of entry to take, how vulnerable it will be, and the expected strength of reaction by competition to its moves in that market. Essentially, the firm must be able to anticipate how its foreign competitors might act or react and to use such information to prepare contingency plans for quick response as appropriate. Users of the Product The firm must understand users, both of its product and those of its competitors. A paramount consideration is documenting and understanding cultural differences as they affect customer needs, products demanded, and purchasing behavior. Analysis and market research can focus on end-user industry categories and, if relevant, on unique characteristics of consumers. Information to help in segmentation should be gathered, using parameters such as age, sex, size, income levels, growth rates of consumption, regional differences, purchasing power, influence over purchasing and purchasing intentions, and the role of credit granting in purchasing behavior. Another major area of research is product benchmarking or quality comparisons, which makes objective comparisons of a firm’s products and its competitors’ products; this can be used to understand product positioning issues by competitors within an industry, as well as positioning across countries, customer response to new product introductions, and the potential for customers’ purchasing the firm’s own brands instead of competitors’ brands. Finally, research should identify market trends for the medium and long term, rather than solely providing information .for decision making on immediate marketing plans and actions. Marketing Mix As we shall see later, a company can standardize or adapt its product as well as its marketing mix to different country markets. Hence, it is also necessary to research marketing mix choice in international markets. The following are areas that should be investigated: 1. Distribution Channels : Their evolution and the firm’s comparative performance in different channels and those of its competitors. 2. Comparative pricing strategies and tactics : The price positioning by all competitors, price elasticity’s, and customer response to differential pricing behavior. 3. Advertising and promotion : The range of choices available, the differences in the allocation of promotion expenditures, the delineation of the advertising response function in different markets, and the comparison of competitor choices in advertising and promotion.
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4. Media research : Useful in determining where to advertise in order to reach target audiences. Major market research firms such as’ A C. Nielsen and the Kantar Group (part of WPP) provide media research and media measurement services. 5. Service quality issues : Relative to positioning by competitors’ and customers’ reactions to higher levels of service. 6. Logistic of network capabilities : Delivery and stock out performance and the use of information systems to improves delivery and customer service. This relatively new area of marketing concern results from increased emphasis on just-in-time inventory systems and customer-direct delivery, bypassing retail inventories. Other key research issues are comparative performance of competitors and customer requirements.

INTERNATIONAL MARKETING

Firm-specific Historical Data
Forgotten in marketing research is the role of a firm’s internal information system in providing data for marketing decisions. Marketing research often can be facilitated by setting up the required database outline and implementing internal data collection; this is particularly necessary for international markets since much information that could be generated within the firm is ignored or lost. Useful data could include sales history by product and product line, by customer and sales force, by distribution channel, within a country and across countries; analysis of such historic data for trends across countries and regions; derivation and analysis of contribution by product, product line, customer, and region; and development of market response functions across countries to permit comparison of past marketing mix decisions and to suggest future mix decisions that may differ from country to country, within a country, or across regions. Once marketing research has been completed, the information that it generates must be analyzed so that questions about future marketing plans and actions can be answered. Major questions that are relevant in international marketing fall into two categories: market and competition decisions and product and marketing mix decisions. In regard to market and competition, the firm should mainly be concerned with three issues: 1. Understanding how customers rate it in comparison to the competition. 2. Determining its chances to attract customers. 3. Deciding whether to compete or cooperate with the competition. As to product and marketing mix, the firm should look at several factors: 1. Choosing which products to introduce, which distribution channels to use, and how to advertise and promote the product. 2. Identifying barriers to attractive markets and finding ways to overcome them. Marketing research can also playa role in helping formulate global strategy. While strategy sets a path for how a firm should interact with its customers, competition, and environment, market research can help by providing information and analyses on environmental trends; changes in competitive behavior and

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11.625.2

government regulation; and shifting consumer tastes. In other words, market research can provide strategic information by focusing on futures research and scenario development. Market researchers who pride themselves on quantitative modeling and statistical rigor might disdain this “soft” world, leaving it to mega trend vision Aries such as Naisbitt. However, market research can resolve strategic planning is such as: 1. Determining the firm’s mission, scope, and long-range objectives. 2. Anticipating environmental changes and their effects, and the resulting opportunities and threats they pose. 3. Understanding the firm’s capabilities versus the strengths and weaknesses of competitors. The above ideas are a far cry from information gathering about consumer responses to new products, prices, and advertising. Yet just as good information is necessary for tactical marketing, so, too, is good information needed to develop and assess long-range plans.

higher per capita income. Secondary sources of information are relatively cheap to acquire, however, and can help prevent a £inn from making major mistakes in its international marketing. Major steps in using secondary data include: 1. Determining research objectives. 2. Clarifying what information is needed. 3. Identifying where such secondary information can be found. 4. Deciding whether the information source is reliable (who put out the information and whether there is a hidden agenda). 5. Assessing the quality of data (accuracy, timeliness, representativeness) and the compatibility of data from different sources. 6. Interpreting and analyzing the information. 7. Drawing conclusions and then relating them to the marketing problem at hand to see if conclusions suggest courses of action or backup planned decisions or actions. The use of probability sampling is necessarily limited where the nature of the relevant universe cannot be reliably determined. Quota sampling is limited for the same reason, so the most frequently employed technique is the convenience sample. This is defensible primarily because of a lack of alternatives. Comparing Several Markets. When data for several markets are compiled, the researcher may find that many gaps exist for example, current data on number of automobile registrations may only be available for a few countries in the group of interest. Data quality may vary and the estimates may not be reliable. The underlying definitions may not be the same, with some countries excluding light trucks from automobile registrations while others include them. Many countries lack specialized firms that develop industry data for specific industries such as automobiles or air conditioners. Problems with Primary Data Much of marketing research involves getting information from people about their perceptions concerning a company’s products, brands, prices, or promotion. People differ from country to country in their income levels, culture, attitudes, and understanding of business issues, including specific items on surveys and questionnaires. Hence, personal interviews require skilled interviewers. Telephone surveys may work poorly and give biased results in countries with low rates of telephone penetration, such as in most of Africa and in countries such as China and India. The use of mall-intercept techniques to obtain personal interviews may give erroneous results because malls are not as widespread in many countries even in Europe, and then subgroup of people visiting a mall may be unrepresentative of the broader audience. Mail surveys require a developed postal system, good mailing lists, and an educated population. Accurate and complete street addresses are necessary to give representative samples for mail questionnaires. If mail and telephone surveys are not practical, the researcher is left with personal interviewing as an alternative. With a largely rural population in the poorer countries, the problem then becomes one of physically reaching the people. Poor roads and lack of regular public transportation may make interviewing them economically unfeasible. In tropical areas, many roads are

INTERNATIONAL MARKETING

Problems in International Marketing Research
Because of its complexity, international marketing may encounter difficulties that are uncommon in domestic marketing research. One problem is that intelligence must be gathered for many markets-over 100 countries in some cases-and each country poses a unique challenge. A second problem is the frequent absence of secondary data (data from published and third-party sources). A third problem is the frequent difficulty in gathering primary data (data gathered firsthand through interviews and field research). Problem of Numerous Market Multiplying the number of countries in a research project multiplies the costs and problems involved, although not in a linear manner. Because markets are not identical £Tom one country to another, the research manager must be alert to the various errors that can arise in replicating a study multinationally. Mayer identifies five kinds of errors to look for in multinational research: 1. Definition error : caused by the way the problem is defined in each country. 2. Instrument error : which arises from the questionnaire and the interviewer. 3. Frame error : which occurs when sampling frames are available from different sources in different countries. 4. Selection error : which results from the way the actual sample is selected from the frame. 5. Non response error : which results when different cultural patterns of non-response are obtained. For example, in one five-country study, the response rate ranged- from 17 percent to 41 percent. Further more, in one country, women composed 64 percent of the respondents, but in another countrymen represented 80 percent of the respondents. Problems with Secondary Data Secondary data for market analysis are less available and less reliable for many foreign markets and low per capita income countries tend to have weaker statistical sources than those with
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impassable during the rainy season. Surveys may be limited primarily to urban areas. In addition, the environment may favor distinct research methodologies; such as instruments with a diversity of questions; the use of physical stimuli, such as the product, an advertisement, or a jingle;’ the control of the data-collection environment; including using simulations’ or, tests of products in use; other criteria such as the perceived anonymity of the respondent. The sensitivity of the information requested, the experience of personnel conducting the survey and the quality of the, data desired will also suggest specific research approaches. Respondents may feel social pressure to respond with answers they perceive to be “socially correct Speed cost, and Controlling for bias also affect the choice of technique Languages Language, is the initial cultural difference that comes to mind when one thinks of foreign markets. At the minimum, the language difference poses problems of communication; solutions to these problems may be expensive. First, the research design and specifications must be translated twice, first (in the, case of a U.S. firm) from English into the language of each country where the study is to be conducted, Then, on completion of the study, the results must be translated back into English. More important than translation expense is the communication problem, also discussed in Chapter 4. Even business respondents-may have difficulty if they are asked in their native language about stock turnover or other business concepts that they are unaccustomed to using. Social Organization Much of marketing research involves gaining insights into the buyer’s decision process. Such research is predicated on the assumption that the decision makers and influencers have been identified. In foreign markets, the researcher usually finds that the social organization is different enough that it is necessary to identify anew the decision makers and influencers. (This subject, including the varying” roles of women, is discussed in Chapter 4.) Differences in social organization affect the industrial market as well as the consumer market. The nature of the decision making structure in foreign companies is possibly different £Tom that in U.S. companies, due to the greater importance of family business in other countries and a greater general stress on relationships. Obtaining Responses Respondents and businesspeople may be reluctant to participate in marketing research for various reasons. Respondents may suspect the questioner of being a government tax representative rather than a legitimate market researcher, or they may be reluctant to respond for fear of giving information to competitors. The idea of business people giving information to anyone, whether the government or an individual, is not well accepted in many countries. In addition, one of the researcher’s greatest problems is trying to demonstrate the value of the research to the respondent personally. Unless this can be done, little will be accomplished with many business respondents. Consumers, too, may be reluctant to respond to marketing research inquiries.’

This may be in part the result of a general unwillingness to talk to strangers. Foreign respondents are often more reluctant to discuss personal consumption habits and preferences than are Americans. In contrast to the reluctant respondent is the cooperative respondent who feels obliged to give responses that will please the interviewer rather than state true opinions or feelings. In some cultures this is a form of politeness, but it obviously does not contribute to effective research. Reluctant or polite responses are not the only barriers. Occasionally, the respondent is not able to answer meaningfully. For example, illiteracy is a barrier when written materials used. This problem can be avoided by using oral interviews. Even when the interview is oral, however, a communication problem that could be called “technical illiteracy” may arise; that is, the terms or concepts used might be unfamiliar to respondents even though phrased in their native language They may not understand the questions and thus be unable to answer. Or they may answer without understanding giving a useless response. Quite apart from the terms used; respondents may be unable to cooperate effectively because they are asked to think in a way foreign to their normal though: patterns. They are being, asked to react analytically rather than intuitively. What ever the particular cause of the inability to Spend, it is basically a translation problem. The research designer must be able to translate not only the words but also the concepts. The cultural gap must be bridged by the research designer. Researching Hispanic Consumers International marketing research invariably comes up against cultural differences that affect the use and efficacy of standard! Western methods and may lead to erroneous interpretation of findings because cultural misunderstandings. Professionals must then turn for help to expert’s who can help bridge cultural gaps. These issues are addressed in a recent book on doing research on Hispanic populations in the United States and elsewhere.5 The book first addresses the question of who Hispanics in the United States are, summarizing demographic census results, describing their various countries of origin and identifying basic Hispanic values such as the importance of family, the importance of feeling empathy for others, views of prescribed gender roles, and time orientation. While Hispanics may be broadly alike, researchers need to bear in mind differences among Hispanic subgroups of Cuban, Mexican, Puerto Rican, and Central American origin, and how these differences affect how they are identified in conducting research. Misidentification and mislabeling can affect response rate and willingness to participate, reliability, and the generalizability of studies. Other pertinent issues include how to gain access to survey participants, how to enhance completion of survey instruments, and how to get beyond socially desirable responses. Such cultural differences require that standard, culturally appropriate instruments be adapted. Questionnaire translation is equally important because often there is no one correct way to translate an English word into Spanish or some other language, and multiple attempts at validation with different native speakers may be necessary. . Another study of Hispanic consumer behavior asserts that immigrant Mexicans have to learn to consume, and in doing so,
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combine consumption patterns learned from being Mexican with consumption patterns learned £Tom American society. Eventual consumption patterns, therefore, are likely to be a hybrid o f Mexican and U.S. consumption vahies.6 As an example, the study cites the initial unwillingness of Mexicans to buy frozen produce or meat, based on the custom of buying it fresh and on a daily basis. The international marketer’s job is made easier when concepts and measurement instruments have been developed and validated across several cultures. While anthropologists have a long history of instrument adaptation, similar efforts are at a rudimentary stage in marketing. An example o f such a direction is the concept of consumer ethnocentrism and an associated scale, CETSCALE. Tested and proven to be reliable across four countries, which are one another’s major trading partners, CETSCALE may be expected to be applied to other countries in the future. Convergence of Consumer Behavior Across Countries Just as one might expect significant divergence among consumers because of cultural and religious differences, a growing convergence of consumer behavior is occurring across countries caused by multinational media and the standardized global marketing strategies of multinationals. For example, a 1995 study from Roper Starch Worldwide suggests that four broad types of consumers exist-types generable to 1.97 billion consumers worldwide. In the same vein, a Gallup poll conducted in the major cities of Argentina, Brazil, Chile, Colombia, and Mexico divides consumers into eight segments across countries, based on questions about income, education occupation, type of home, and ownership of automobiles and durable goods.9 The survey excluded low-income workers (about 17percent of the working-population) and ignored rural markets. Based on its sample of ‘I7,564 people call up divided Latin American consumers into eight categories: Emerging professional elite:14% Progressive upper-middle class: 13% Traditional elite: 11 % Self-made middle class: 11 % Skilled middle class: 9% Industrial working class: 14% Self-skilled lower middle class: 13% Struggling working class: 15% Improvisation Some improvisation is probably used in all marketing research, but a higher degree is needed in international markets. Improvisation may be loosely defined as unconventional ways of getting the desired market information and or finding proxy variables when data are not available on the primary variables. One such approach is the use of national consumption statistics, by volume or units, for various items. Such statistics filter out exchange-rate anomalies that arise in the use of currency-based economic indicators. Examples of such information include the number, in units, of radios, televisions, and VCRs used; life expectancy at age one; the number of hospital beds available and doctors per 100,000 people; consumption of
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various food items on a per capita basis; the per capita availability of goods such as telephones, cars, and motorcycles; the number of airline and train revenue passenger miles sold per year; the consumption of electricity and steel; and the average number of years of schooling completed by the population. All such indicators are generally available for a variety of countries and can be used to group countries and can be correlated with market-size information. New Services to Aid the International Firm As international business continues to grow, more and more international marketing research services are available to aid firms. Existing international marketing research organizations are expanding into more countries with more services, and new organizations are entering the field. It is not possible to catalog all of these but an example is International Information Services Ltd. (IIS), a global product pickup service for consumer packaged goods manufacturers. It has 400 clients in over 30 countries, including Coca-Cola, General Foods, J. Walter Thompson, and Unilever. Each day supermarkets in 120 countries are “raided” by IIS shoppers buying products or searching for information needed by clients. They provide samples of competitive products, client products for monitoring of quality, and/or information on competing brands (ingredients, varieties, sizes, prices, etc.). Learning by Doing If the costs of primary marketing research are too great, another way to evaluate a market is by becoming an exporter. After a year or two of export experience, the firm will know more about actual market behavior than could be learned from a preliminary market study. If the market proves difficult or unprofitable, the firm can withdraw without major losses. If the market proves attractive, the firm might consider a heavier commitment in the country.

INTERNATIONAL MARKETING

Other Research Techniques to Use in Developing Countries
Moyer has suggested four techniques that are relevant for researching small, lower income markets: analysis of demand patterns, multiple-factor indexes, estimation by analogy, and regression analysis. Analysis of Demand Patterns Countries at different levels of per capita income have diverse patterns of consumption and production. This commonplace observation is illustrated in Figure 7-1.) The importance of this statement lies in the fact that the researcher can usually get data at this macro level for most countries. This simple technique, known as the multiple-factor index approach, thus allows insights into the consumption production profiles of many countries. Though relatively crude, it gives a clue both to a country’s present position and the direction it is going. This in turn helps the firm identify possibilities for export or local production in that market. Multiple-Factor Indexes A multiple-factor index measures market potential indirectly, using as proxies a number of variables that intuition or statistical analysis reveal to be closely correlated with the

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potential market for the product in question. For example, a manufacturer of modular housing may look at these factors: 1. The rate of household formation. 2. Population demographics to gauge the percentage of the population in the age bracket from 20 to 30 years, a prime household forming segment. 3. Income-level segments with some minimum per capital household income such as $2,000 per year being used to gauge purchasing power. Smoothing out these numbers over several time periods and relating them to historic house sales and new housing construction may provide useful estimates of potential market size. Estimation by Analogy For countries with limited data, estimating market potential can be a precarious exercise. Given the absence of hard data, one technique-estimation by analogy can be helpful in getting a better feel for market potential in such countries. This estimation is done in two ways: (1) through cross-section comparisons and (2) through the displacement of a time series in time. The cross-section comparison approach involves taking the known market size of a product in one country and relating it to some economic indicator, such as disposable personal income, to derive a ratio. This ratio (of product consumption to disposable personal income in our illustration) is then applied to another country where disposable personal income is known in order to derive the market potential for the product in that country. The time-series approach estimates the demand in the second country by assuming that it has the same level of consumption that the first country had at the same level of development (or per capita income). This technique assumes that product usage moves through a cycle, with the product being consumed in small quantities (or not at all) when countries are underdeveloped and in increasing amounts with economic growth. Thus, looking at meat and egg consumption in Taiwan in the late 60s and early 70s can allow a rough estimation of demand for meat and eggs in mainland China in the 90s, with Chinese incomes being at about the levels prevalent in Taiwan in the early 70s. Both approaches have limitations. The cross-section method assumes a linear consumption function. Both assume comparable consumption patterns among countries. When these assumptions are not true, the comparisons are misleading. When more sophisticated techniques are not feasible, however, estimation by analogy is a useful first step. . Using Long-Term Trend Data to Estimate Market Size The parcel tanker industry provides an example of how longterm trend data can be used to estimate market size. Parcel tankers (as distinct from oil tankers) are used to transport bulk liquids such as chemicals. Freight rates can vary depending on demand and supply. In 1995, rates were about $60 per ton, compared to around $48 per ton in 1994 Operating leverage is high in the industry. A $1 increase in the freight rate, for example, can mean an additional $11 million in operating profit for a major parcel tanker company such as Stolt-Nielsen, a Norwegian tanker” company that transports, stores, and
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distributes bulk liquids. Such tankers are usually chartered for long periods, and as charters end and new charter periods are negotiated, charter rates can be increased depending on the prevailing demand supply patterns. For a company such as Stolt, forecasting demand and supply is important in determining both what charter rates might be like in the future, as well as whether to order new tankers to be built. This decision is important because, depending on shipyard backlog, tankers must be ordered to precise design specifications and then built, with delivery from time of order stretching out to as long as two years. Several factors go into compiling such data, especially the forecasts for the near-term future period, 1995 to 2000. Demand figures are derived from estimating the rate at which worldwide transportation of chemicals is growing, which in turn is related to GDP growth, particularly in Southeast Asia; demand is growing at 5 to 7 percent a year. Then, on the supply side, the existing number of tankers available is known, and to that is added the number of new tankers being built and the rate of scrap page. That is, old, obsolete tankers nearing the end of their seaworthy days and posing environmental hazards because of leakage problems will be taken out of service, thus reducing the total supply. As can be seen, demand will outstrip supply over the next few years by almost one million metric tons, suggesting that freight rates will rise sharply and that several new tanker orders will be placed. To the extent that a company such as Stolt Nielsen is armed with such information earlier than its-competitors, it can charge higher rates and lease its tankers on spot rates rather than on long-term charters, thus increasing its profits. It can also order new tankers earlier, thus being able to increase its capacity in a timely fashion, taking advantage of healthy demand conditions. By placing orders early, it can also be more sure of getting its tankers delivered on time (a latecomer may find that the shipyards are too busy, that delivery is far off, and that by the time delivery occurs, demand and supply may once more have moved into balance, reducing rates once again.) Based on the demand and supply projections, Stolt-Nielsen has ordered 10 new parcel tankers for delivery over the next three years. It took delivery of a 37,000ton, alt-stainless-steel chemical tanker from Danyard in Denmark, and will be getting six more from the same yard, as well as three others of similar design from a shipyard in France. Stolt might scrap some older tankers during the same time frame. In addition, the company is expanding into Asia by establishing special tank container cleaning and repair facilities and developing bulk chemical storage locations in Japan, Korea, Taiwan, Mainland China, and Singapore. 13 The researcher should however, keep in mind that as global economic conditions change, such forecasts need to be updated. For example, during the 1997-913 period, the Asian economies fell into a recession, and their demand for basic products such as chemicals dropped sharply, affecting world demand for tankers to transport chemicals. At the same time, shipyards in countries such as Korea, China, and Japan attempted to preserve jobs by cutting ship prices, leading to a shift of demand for ships to these countries and creating the possibility of overbuying currently-in essence “borrowing”

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from future demand, with the possibility of limiting future demand. Regression Analysis Regression analysis provides a quantitative technique to sharpen estimates derived by the estimation-by-analogy method just discussed. Cross-section studies using regression analysis benefit from existing predictable demand patterns for many products in countries at different stages of growth. The researcher studies the relationship between gross economic indicators and demand for a specific product for countries with both kinds of data. The relationship derived can then be transferred to those countries that have only the gross economic data but not the product-consumption data. The equation used here was the simple regression y = a + bx, where y is the amount of product in use per thousand of population and x is per capita GNP. GNP would result, on the average, in an increase of 10 automobiles, 10 refrigerators, 9 washing machines, 7 TV sets, and 27 radios per 1,000 populations. Construction of such a table relevant to the products of a specific firm can be very useful. The model can use additional independent variables beyond GNP per capita. For example, airlines forecast air traffic growth with two factors, per capita GNP growth and the yield in cents per mile (“yield” is the air fare for a route divided into the distance, or number of miles on that route). Over long periods, this regression model has proved reasonably accurate, with air traffic growing as incomes grow and dropping as fares rise. There are limitations to using regression, however. For example, as a product approaches saturation levels, the rate of consumption declines, requiring a different equation to explain the relationship. Nevertheless, regression analysis can provide useful insights. Comparative Analysis Comparative analysis is an attempt to organize information and experience to maximize their usefulness. In international marketing, this means that the company gathers and organizes its intelligence from all its global operations to see what new insights can be gained. Grouping or classifying objects is an important step in understanding markets. Competing products can be grouped together to understand the different segments that are being targeted. Consumers can be grouped to assess customer segments. And countries can be grouped to determine which markets are similar to 1 one another. In this way, a generic strategy can be prepared for the countries belonging to a group rather than approaching each country individually. Moreover, groups of countries can be compared in evaluating market performance. One of the difficulties of comparative market performance assessment is that markets are different so the comparison may be unfair. Performing comparisons only on countries that are similar enough to belong to a group mitigates this problem. Cluster Analysis The approaches used to develop a short list of potential markets include comparative analysis of countries using macroeconomic and consumption data. Cluster analysis is a
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favored technique of identifying similar markets. The goal here is to ensure that the countries with the greatest potential make it to the short list for further investigation. The mathematical techniques of cluster analysis were used by Sethi to develop seven distinct groups of countries. To develop these distinct groups, Sethi first used four sets of variables for each of the countries to be analyzed: 1. Production and transportation variables : measured by items such as air passenger and cargo traffic, electricity usage, number of large cities, and population. 2. Consumption variables : based on income and GNP per capita, the number of cars, televisions, hospital beds, radios, and telephones per capita, and educational levels of the population. 3. Trade data : derived from import and export figures. 4. Health and education variables : using data such as life expectancy, school enrollment, and doctors per capita. Once “scores” for these four variables are developed for each country, the countries themselves are grouped into seven distinct groups. The implication is that if similarity of countries within the groups is sufficiently strong that similar marketing strategies can be used for all countries within a group. Similar cluster analysis techniques are used by Economist Intelligence Unit (EIU) to group markets based on the opportunities they offer. EIUs indexes cover market size, market growth rates, and market intensity (which measures the relative concentration of wealth and purchasing power in those countries). For example, the market-size index is derived from data on population, consumption statistics, steel consumption, cement and electricity production, and ownership of telephones, cars, and televisions. Note the similarity of the variables used at EIU to those used by Sethi in his analysis.
Clustering Countries by Product Diffusion Patterns

INTERNATIONAL MARKETING

A problem with clustering countries on the basis of macroeconomic variables is that the resulting segments may not be helpful to international marketers because acceptance and diffusion of new products may vary within the proposed segments. An alternative is to segment countries based on how similar they are in the rate at which new products are adopted (the product diffusion rate). If such segments could be derived, managers could use information from the lead market, about variables such as growth in market size, when sales reach a peak, to make inferences on the same variables for lagging markets. This allows a country to belong to more than one segment at the same time. For example, the United States could be in the leading market segment for a product such as advanced personal computers, while lagging in the use of products such as smart cards or high-speed trains. Macroeconomic data such as the standard of living are, of course, important in explaining the readiness of a country market to accept innovation; in addition, a diffusion-based segmentation approach uses data about factors such as lifestyle (use of phones per capita, for example), and cosmopolitanism (tourist expenditures and receipts). A recent research study looked at the relationship between such country-level variables and sales growth over a 14-year period for three consumer
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durables—color TV sets, VCRs, and CD players-for 12 advanced industrial nations from Europe, as well as Japan and the United States. The study showed that segments based on product adoption rates did not agree with segments derived from broad macroeconomic data alone, suggesting that countries that look similar from a broad macroeconomic perspective may differ in the rate at which they are willing to adopt and buy new products. Cultural factors such as language and religion, which were not specifically included in the study, may play an important role in explaining differences in the product diffusion rate. In addition, other recent studies have noted the importance of culture, mobility, and sex roles as important factors in explaining differences in product adoption rates. Screening Potential International Markets Another marketing research screening technique useful to derive a short list of key country markets is described here, as applied to the market for kidney dialysis equipment. 18 The first step is to determine which countries can afford such medical equipment. The high cost of kidney dialysis equipment and necessary supplies and personnel limits the market to wealthy countries. Hence, a first screen might be based on the wealth of a country, measured by the following: 1. A total GDP of over $15 billion. 2. GDP per capita of at least $1,500. This screen alone reduces the number of potential markets to 28 countries outside North America. Next, the markets must have specialized hospitals and doctors who can competently administer dialysis treatment. In addition, the treatment is expensive and requires a certain level of government support and subsidy, or the market for private patients alone would be too small to justify attempts at market penetration. Thus, a second screen would include other criteria: 1. No more than 200 people per hospital bed. 2. No more than 1,000 people per doctor. 3. Government health care expenditures of at least $100 million. 4. Government health care expenditures of at least $20 per capita. This calculation then results in a set of 19 countries as potential markets. A third screen analyzes the markets in terms of the current market for dialysis equipment Two factors are used: 1. At least 1,000 deaths per year, due to kidney-related causes. A lower number might indicate that the market for dialysis equipment is already being well served by competition: 2. At least 40 percent growth in the number of patients being treated with dialysis equipment. This results in just three markets being considered: Italy, Greece, and Spain. A fourth screen consists of carefully evaluating the three countries in terms of existing competition, political risk, and other factors. Management subjectivity can enter here because some managerial judgment is required in evaluating the

strength of competition and political risk. Management may well decide to enter more than one of the three markets identified thus far. It may also go back to the third screening step and reduce the required rate of growth to, say, 30 percent, in 1 order to add some additional potential markets. Once a short list of potential markets has been made up, individual markets must be studied more carefully. At this point, information can be obtained from the Department of Commerce’s Comparison Shopping Service (CSS). A CSS survey covers a product in a particular country market, indicating the product’s overall marketability, chief competitors, comparative prices, customary entry, distribution, and promotion practices, trade barriers, and the degree to which the company’s product competes. About 50 key countries are covered by this low-cost and timely service Gap Analysis The goal of gap analysis is to analyze the difference (“gap”) between estimated total market potential and a company’s sales. The gap can be divided into four categories: 1. Usage gap : The usage gap refers to total industry sales being less than the estimated total market potential. Such gaps may have their explanation either in estimation errors or in unpredictable changes in consumer tastes and behavior, such as, for example, eggs being less in demand than expected. In the United States, such a usage gap would probably be traced. to health-related concerns. 2. Competitive gap : Competitive gap refers to existing market share compared with expected market share; analysis is needed to indicate why market share shifts have taken place and what is needed to regain market share from competitors. 3. Product-line gap : Product-line gap arises because a company does not have a full product line compared to its competitors; thus, it loses sales. All example might be in the computer industry, where a part of the product line is small, portable laptop computers. To the extent that Dell was late in marketing or did not have a laptop computer available, its market share was less than it would have been if it had fielded a full product line. . Toshiba faced the opposite problem, offering only laptops in the U.S. market and losing corporate sales because the clients wanted to buy both laptops and PC servers an? desktops from the same company. 4. Distribution gap : A company with a distribution gap is failing to target part of the market because of a lack of distribution facilities or agents. Closing such a gap would require that the firm extend distribution and product availability to cover all regions and segments of the market. Input-Output Tables Input-output tables, provide an analytical tool of great value in studying demand in foreign markets. They are becoming increasingly available, for many more countries, particularly for the advanced industrialized nations and: the newly industrializing countries such as Brazil, Taiwan, and India. They are useful both for industrial product analysis and for the analysis of market demand for intermediate components and materials. Input-output tables give specific attention to how production

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functions vary among nations and thus allow the researcher to adjust market forecasts to account for such country differences.

Marketing Research Models
Modeling Consumer Behavior
Why U.S. Buyers Buy Japanese Cars?

Market research professionals often seek to model consumer behavior in the international marketplace. One model attempts to explain why U.S. households buy Japanese cars. Developed by Dardis and Soberon-Ferrer, it hypothesizes that buying Japanese cars is affected by household characteristics that, in turn, determine the weight given to different product attributes, leading eventually to the decision to buy or not buy a Japanese car. Specifically, the variables used to profile household characteristics include income, age, sex, marital status, race, education of the head of the household, geographic location within the United States, and a variable labeled “the origin of disposed stock,” meaning, whether a previous car sold (if any) was of Japanese or other origin (i.e., whether that household had previously owned a Japanese car). In a similar fashion, product attributes modeled included variables that primarily capture automobile quality: cost of repair, frequency of repair, operating efficiency (miles per gallon), weight (a means of gauging comfort and safety), the depreciation rate (a reflection of the resale value of the car), and finally, the purchase price of the car, which is held constant to isolate the effect of the quality variables. It is important to marketers to develop a model on which to base their data collection and analysis efforts. The model can be modified to include additional variables such as social class, religion, and occupation. The bottom line is that an explicit model allows a directed research effort to gather and analyze data, which permits validation and modification of the model. For example, the Dardis and Soberon-Ferrer model showed that lowering the depreciation rate of the car by percent a year increased the probability of buying a Japanese car from 22 to 26 percent. Similarly, lowering the fuel economy (miles per gallon) by 10 percent dropped the probability of buying a Japanese car from 22 percent to 14 percent. The implications for marketing strategy are clear. For a U.S. company trying to catch up to the perception of Japanese cars, several methods exist to lower the probability that a household will buy a Japanese car: Rather than rely on vague appeals to buy American, companies should improve U.S. cars so that they depreciate slower, cost less to own and operate, and require repair less frequently. Significantly, the proposed model, when applied to past car-purchasing decisions, was able to correctly predict whether households would buy a Japanese or nonJapanese car 96 percent of the time. Household Buying Behavior
A Study from Saudi Arabia

this category. Understanding whether households in different countries approach major purchasing decisions differently is critical in making international marketing decisions about product positioning, advertising appeals, direct-mail and telemarketing campaigns, and building loyalty. Marketers are interested in who makes the buying decisions in a family, and the relative influence during critical steps such as whether to buy, when to buy, where to buy, and how much to pay. Several competing theories exist to explain family purchasing behavior: 1. Culture-defined behavior : whereby cultural norms prescribe which spouse has more power in influencing purchase decisions. 2. Resource contribution-based power : whereby the spouse who contributes more resources (e.g., income, status, education, etc.) is more powerful in influencing decisions. 3. Relative involvement : whereby the spouse who has the greater interest and involvement in a product or service will have more influence over its purchase. Countries and societies can be categorized26 as: (1) patriarchies; (2) modified patriarchies, consisting of modernizing nations that were patriarchies in the recent past; (3) transitional egalitarian, with movement toward equality of influence within the family, and greater weight being given to education, occupation, and income; and (4) egalitarian, with strong norms about equality of husbands and wives and power sharing. Household purchasing behavior can be expected to differ across these different kinds of societies. A study on family purchasing behavior in Saudi Arabia showed how role behaviors of husbands and wives can significantly differ across countries.27 Limited to a sample of 249 upscale, married Saudi women, the study is interesting as a study of family purchasing behavior in a developing country. It found that (1) husbands dominate consumer decision making in Saudi Arabia, as is the case in many developing countries; (2) husbands are dominant in deciding on buying a car and on “where to buy,” except in the case of women’s clothing; (3) in many cases, Saudi wives who work and/or are more educated, have more influence over purchasing decisions. Overall, husbands dominate purchase decisions in what is a predominantly patriarchal Saudi society. Country-of-Origin Effects An important variable affecting consumer purchase in international marketing is the country of origin (CO). There are many products where the CO is important to consumers, such as perfumes, cars, high-fashion clothes, consumer electronics, and software; for all these products country-specific stereotypes exist, with certain; countries being associated positively with certain products. Examples are French perfumes and German cars. For such products, knowing the CO affects how consumers evaluate a product. In many cases, the country of manufacture {COM) also relevant (e.g., in India, consumers often want to look inside TV sets to see where components have been manufactured). Once consumers are aware of CO, their familiarity with the brand, level of involvement in the purchase decision, and existing preference for domestic products become relevant, as do product-, and market; level influences, such as the type of

INTERNATIONAL MARKETING

For many products, buying decisions are made jointly, by households, by husbands and wives, and in some cases, by children. Products such as houses, automobiles, furniture, and consumer durables such as refrigerators and stoves would fall in

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What does this mean for the firm? CO and COM effects have implications for standardization of marketing programs (whether to source from one or more locations. Together these influences result in a country-stereotyping effect and ultimately affect the purchase decision. Differences also existed at the national level. A recent study attempted to trace the effects of religiosity on consumption behavior for a sample of Japanese and U. As an exploratory study. tending to not believe advertising claims while preferring subtle and informative advertisements. devout Protestants were “more economic. Environmental influences also come into play. and even plant location decisions. the Middle East.S. being open to buying foreign-made goods.C. design. such as quality. level of economic development of the countries from which products come.625. how to adapt). one first has to define religiosity and then attempt to relate it to different aspects of marketing and consumer behavior. in the United States. believing that there was little relation between price and quality.product and brand image. Religiosity and Consumer Behavior Cultures differ in many ways. enjoying shopping. For example. aesthetics. we cannot generalize from this study. and truth-in-Labeling requirements as well as demand conditions can mediate the effect of CO. and China. including the existence of global markets (when CO may become less important). and thus greater credence might be given to country-of-manufacture effects. particularly when marketing to countries with distinct religious systems such as India. In industrial product buying. The study found that consumer shopping behavior did not seem significantly different between devout and casually religious Japanese individuals. performance. selecting the image in advertising. and with none of the respondents having progressed beyond a high school education. Together. However. visiting many stores to find the right brand. Table 7-8 summarizes these ideas.” buying products on sale. all other things being equal. for positioning the product. INTERNATIONAL MARKETING 118 © Copy Right: Rai University 11. It is natural to ask whether religion affects consumer behavior. are devoutly religious people different from more secular people when it comes to enjoying shopping and buying a large variety of material goods? What sorts of advertising appeals are more likely to resonate with a religious person? In order to answer such questions. Tokyo and Washington. price. consumers.’ powerful brand image may be associated with a company and may overcome origin of manufacture area. “rational” purchasing might be more prevalent. and preferring stores with better service. social. shopping in stores with lower prices. and prestige. with a total sample of under 250 drawn from just two cities. and political. Japan. The reputation of the dealer or intermediary may muffle or enhance CO or COM effect.2 . and cultural influences favoring certain nations.. product attributes might be relevant. with Japanese shoppers preferring to buy domestically made products. It is useful in suggesting directions for international marketing research. D. these disparate decisions affect overall brand profitability. with a central difference being religion.

In the 1980s. Global Market Segmentation 2. as one author put it. and occupation. it is the process of identifying specific segments-whether they be country groups or individual consumer groups-of potential customers with homogeneous attributes who are likely to exhibit similar buying behavior. observer suggested that the European market could be divided into three broad categories-international sophisticate. or group of people that has significant potential to respond. because many women in these countries view smoking as a symbol of their improving status in society. Global market segmentation is the process of dividing the world market into distinct subsets of customers that behave in the same way or have similar needs. the tobacco companies are aggressively targeting women.” Interest in global market segmentation dates back several decades. B. income.key criteria: geography. tobacco companies are targeting smokers in developing countries such as China. national income is the single most important segmentation variable and indicator Global Market Segmentation Market segmentation is the process of subdividing a market into distinct subsets of customers that behave in the same way or have similar needs. Geographic segmentation also has major limitations: The mere fact that” markets are in the same world geographic region does not meant that they are similar. the desire to be healthy and free of pain. Global Product Positioning Cigarettes are one of the most widely distributed and profitable global consumer products. less developed. Levitt described this trend as the “pluralization of consumption” and “segment simultaneity” that provides an opportunity-for-marketers to pursue a segment on a global scale. education. smoking is fashionableness. the love of mother and child) were universal and could be used in advertising around the globe. fewer children. Thailand.A.regional foods such as sushi. An other powerful tool for global segmentation is horizontal segmentation by user category.T. region. semi sophisticate. and Russia. It is also possible to cluster different national markets in terms of their environments (e. the desire to be beautiful. and provincial-solely on the basis of consumers’ presumed receptivity to a common advertising approach. and higher incomes and living standards-suggest the emergence of global segments. demographics (including national income and size of population). or hamburgers might be in demand anywhere in the world. benefits sought. and benefits sought. global companies (and the advertising agencies that serve them) are likely to segment world market according to one or more . one 11. tobacco industry giants such as Britain’s B.2 © Copy Right: Rai University 119 .A. A number of demographic trends aging population. intentions. Moreover.g. For most consumer and industrial products. Another writer suggested that some themes (e. attitudes. but one is a high income. The process begins with a basis of segmentation-a product-specific factor that reflects differences in customers’ requirements or responsiveness to marketing variables (possibilities are purchase behavior. Such targeting reflects the reality that a company should identify those consumers it can reach most effectively and efficiently.g. Professor Theodore Levitt advanced the thesis that consumers in different countries increasingly seek variety and that the same new segments are likely to show up in multiple national markets. Global Targeting 3. TARGETING AND POSITIONING This lesson aims to give a clear understanding to the student of the following: 1. or loyalty). Simon found in his sample of “hidden champions” that geography was ranked lowest as a basis for market segmentation (see Figure 7-1). In the late 1960s. and positioning are all examined in this chapter.. The actions taken by managers at Philip Morris. Segmentation.T. However. Thus. Japan and Vietnam are both in East Asia. preference. ethnic or. and other tobacco companies are examples of market segmentation and targeting. Demographic Segmentation Demographic segmentation-is based on measurable characteristics of populations such as age. and lifestyles). pre industrial society.INTERNATIONAL MARKETING LESSON 13: SEGMENTATION. The advantage of geography is proximity: Markets in geographic segments are closer to each other and easier to visit on the same trip or to call on during the same time window. postindustrial society and the other is an emerging. In particular. The differences in the markets in these two countries overwhelm their similarities. Targeting is the process of evaluating the segments and focusing marketing efforts on a country. targeting. more women working outside the home. Greek salad. Each subset may conceivably be chosen as a market target to be reached with a distinctive marketing strategy..625. or. Market segmentation represents an effort to identify and categorize groups of customers and countries according to various characteristics. as the number of smokers in high-income countries declines due to heightened antismoking sentiment and health concerns. Geographic Segmentation Geographic segmentation is dividing the world into geographic subsets. and the status assigned to Western cigarette brands-interacts to expand the smoking market and brand share of the leading global brands. behavioral characteristics. psychographics (values. the presence or absence of government regulation in a particular industry) to establish groupings. India.. Industries PLC and America’s Philip Morris Company have set their sights on new market opportunities. gender. usage. These are nations in which a combination of forcesrising incomes in some countries and challenging economic conditions in others.6 Today.

In India. desires. Porsche Cars North America. entertainment.0 billion. If television ownership were used as a benchmark. soft drinks. the marketing challenge is to successfully serve the existing mass market for inexpensive consumer products. and the prescription was 30 rupees or US $1. however. lower middle income. and Japan. The U. buy Porsches and expect to be noticed. Procter & Gamble. Unilever. Pinning down a demographic segment may require additional information. China and India. This segment’s needs and wants are spread over various product categories: durable goods (luxury automobiles).400. If middle class is defined as “persons who own a refrigerator. India. North America. it is necessary 10 determine the purchasing power of the local currency.3 billion) and its multibillion-dollar purchasing power. market.587 in Luxembourg.as 100 million Chinese customers are affluent enough to spend. Technological change in telecommunications makes it easier to reach the global elite segment. for example. and other packaged-goods companies are targeting and developing the China market. because he knew that malaria was a hazard in India. Another global segment is the so-called elite: older. and a population of more than 275 million people.S. cigarettes. for Proud Patrons and Fantasists. for example. About 73 percent of world GNP is located in the Triad.S. Its U. One global segment based on demographics is global teenagers-young people between the ages of 12 and 19. The global telecommunications revolution is a critical driving force behind the emergence of this segment. In India. music. Top Guns. with respective populations of 1. by virtue of their interest in fashion. non durables (upscale beverages such as rare wines and champagne). Thus. Segmenting decisions can be complicated by the fact that the national income figures such as those cited previously for China and India are averages. Psychographic Segmentation Psychographic segmentation involves grouping people in terms of their attitudes. highincome segments in both of these countries. for example. Johnson & Johnson. and trendy and image-oriented products). This fact. turned to psychographics after watching worldwide sales decline from 50. Note also that the average income figures quoted here do not reflect the standard of living in these countries. the pills. novelty. might represent attractive target markets. Data are obtained from questionnaires that require respondents to indicate the extent to which they agree or disagree with a series of statements. from a low of $81 in the Congo to a high of $38.3 billion and 1. In a country such as China.953. Benetton. per capita gross national product (GNP) is $24. on the other hand. Young consumers may not yet have conformed to cultural norms-indeed. fast-growing.2 INTERNATIONAL MARKETING 120 © Copy Right: Rai University . Laura Ashley and Ferragamo has also yielded impressive results.S. 100 million people call be classified as “upper middle class. and some packaged goods-population is a more important segmentation variable than income. he requested a prescription and a one-month supply of malaria pills. Global telemarketing is a viable option today as AT&T International 800 services are available in more than 40 countries. they may be rebelling against them.8The important lesson for global marketers is to beware of the misleading effect of averages. Coca-Cola. psycho graphics is primarily associated with SRI International. and a youthful lifestyle. subsidiary. In low income countries. demographics aside. already had a clear demographic profile of its customers: 40+-year-old n1ale college graduates whose annual income exceeded $200. where “per capita GNP is only $930. combined with shared universal needs. Satellites such as Asia Sat I are beaming Western programming and commercials to millions of viewers in China. There are also large. In Sweden. Increased reliance on catalog marketing by upscale retailers such as Harrods. Porsche buyers could be divided into five distinct categories. lured in part by the possibility that as many . Annual per capita income varies widely in world markets.000 in 1993. exhibit consumption behavior that is remarkably consistent across borders. a market research organization whose original V ALS and updated V ALS 2 analyses of U.of market potential.000 units in 1986 to ‘about 14. India’s middle class has been estimated to be as low as a few million and as high as 250 million to 300 million people. 14 cents for a single use pouch of shampoo. which distort the true market conditions in emerging markets. the actual purchasing power of the local currency is much higher than that implied by exchange values. and financial services (American Express gold and platinum cards). say. He decided to visit a doctor to get a tetanus shot and. and fantasies (for name brands. consumers are widely known.” with average incomes of more than $1. with per capita income of $29. Teens. In order to really understand the standard of living in a country. The World Bank segments countries into high income. He did this.000. and the bill from the doctor for the shot. the middle class would be 100 million to 125 million people. Thus. This segment is attractive both in terms of its size (about 1.487. and Sony are some of the company’s pursuing the global teenage segment. such conspicuous consumption is irrelevant. and low income. more than $8. that Americans are a favorite target market! Despite having comparable per capita incomes. Age is another-useful demographic variable. and lifestyles. and other countries. A psychographics study showed that. Kao. the authors’ colleague recently returned from a trip during which he received a slight cut on his forehead from a taxi trunk lid. make it possible to reach the global teen segment with a unified marketing program. then.00. values.3 trillion in 2000 national income. by segmenting in terms of a single demographic variableincome-a company could reach the most affluent markets by targeting three regions: the European Union. is enormous.” the figure would be 30 million people. for example. Sweden’s smaller population of 9 million means that annual national income is only about $220 billion. Porsche AG the German sports-car maker. Global media such as MTV are perfect vehicles for reaching this segment. In the United States. Many global companies also realize that for products with a low enough price-for example. Porsche will use the profiles to develop advertising 11. upper middle income. Little wonder. Swatch. other industrialized countries are nevertheless quite small in terms of total annual income. more affluent consumers who are well traveled and have the money to spend on prestigious products with an image of exclusivity.625.

In Japan. you need to be acutely sensitive to cultural differences. the average withdrawal is $289. Notes Richard Ford. and purchase behavior characteristics of the seven groups. as noted previously in the discussion of Global Scan. being noticed doesn't matter Cosmopolitan jet setters and thrill seekers. care about power and control. Although bottled water may be considered a luxury product in some high-income markets. and users of competitors’ products. Canada. Behavior Segmentation Behavior segmentation focuses on whether people buy and use a product. 1. don't care about impressing others. followed by Switzerland. and Succeeders). Aspirers. These in human behavior that are culturefree and so basic that they can be found all over the globe.”” given up. Porsche vice president of sales and marketing. and values of these segments range from “survival. marketers at global companies that are Y &R clients are cautioned not to assume that they can develop one strategy or one commercial to be used to reach a particular segment across cultures. the researcher concluded. The average dollar amount withdrawn also varies considerably.tailored to each type. One early application of psychographics outside the United States focused on value orientations of consumers in the United Kingdom. regulars. Consumers can also be segmented according to user status: potential users. ex-users. and Young & Rubicam (Y&R). Middle Majority (Mainstreamers. a reward for working hard.” Results have been promising Porsche’s U. The United States is far down the list with $68 as the -average withdrawal. Japanese people tend to carry around a lot more cash than people in other countries. Financial institutions have to consider many different pieces of information regarding consumer behavior toward saving and spending n10ney.2 © Copy Right: Rai University 121 . “As you get closer to the evectional level. a car is a trophy.” and “social altruism” (Reformers). Spiel Vogel & Bates Worldwide (BSB).” and “subsistence” (Resigned Poor) to “social betterment. You wouldn’t want to tell an elitist how good he looks in the car or how fast he could go. But at the origin.” “social conscience. and the United States where the average is slightly higher than 600. work. heavy. and nonuser. D’arcy Massius Benton & Bowles (DMBB). and Germany. not an extension of one's personality Ownership is what counts. Table 7-1 : Psychographic profiles of Porsche’s American customer Category Top Guns Elitists Proud Patrons Bon Vivants Fantasists % of all owners 27% 24% 23% 17% 9% Description Driven and ambitious. despite their low income. and Innovators (Transitional and Reformers). a car-even an expensive one-is just a car. including Backer. Combining the 4Cs data for a particular country with other data permits Y &R to predict product and category purchase behavior for the various segments. first-timers. medium. are willing to pay 18 rupees a bottle for clean water because of the widespread presence of arsenic poisoning in well water and the pollution of surface water. 11. “We were selling to people whose profiles were diametrically opposed. The goals motivations. Tobacco companies are targeting China because the Chinese are heavy smokers. Consumers can be categorized in terms of usage rates for example. SRI International has recently conducted psychographics analyses of the Japanese market. as well as how often and how much they use it. light. Table 7-2 shows some of the attitudinal. Japan has the highest number of cash dispensers. Nestle is marketing bottled water In Pakistan where there is a huge market of nonusers who. it’s of enormous benefit to be able to think about people who share common values across cultures.115 per 1 million population. broader-scope studies have been undertaken by several global advertising agencies.625. lifestyle. Although the study was limited in scope. This is followed by Switzerland at $187 and Italy at $185. sales improved nearly 50 percent in 1994. “The underlying values structures in each country appeared to bear sufficient similarity to warrant a common overall communications strategy-. may even feel guilty about owning car INTERNATIONAL MARKETING Attitudes Resigned Poor Work Lifestyle Shut-in Television Sports Television Family Gardening Trendy sports Purchase Behavior Staples Price Price Discount stores Habit Brand loyal Unhappy Labpr Distrustful Unskilled Struggling Poor Unhappy Labor Dissatisfied Craftsmen Mainstreamers Happy Belong Aspirers Unhappy Ambitious Succeeders Happy Industrious Transitional Rebellious Liberal Reformers Craftsmen Teaching Sales White collar Managerial Professional Student Health field Conspicuous Consumption Fashion magazines Credit Travel Dining out Arts/crafts Special-interest magazines Luxury Quality Impulse Unique products Ecology Homemade/grown Inner growth Professional Reading Improve world Entrepreneur Cultural events Three overall groupings can be further subdivided into a total of seven segments: Constrained (Resigned Poor and Struggling Poor). expect to be noticed Old money. France. nonusers. As a Y &R staffer notes. Yet.S. car heightens excitement Car represents a form of escape.

Vertical Versus Horizontal Segmentation Vertical segmentation is based on product category or modality and price points. At the time of C9ke’s entry. Fuji is also developing its market in Europe. Fuji’s U. This would appear to be a difficult position to challenge. where Kodak commands “only” 40 percent of the color film market Fuji currently enjoys 25 percent of the European market.S. segmenting is the process by which marketers identify groups of consumers with similar wants and-needs. national. where Fuji must also jostle with other newcomers such as Konica and Polaroid. compared with 10 percent a decade ago. color film market did not deter Fuji from launching a competitive offensive. its market share there currently stands at about 10 percent. market share has been in the 10 to 16 percent range. after nearly two decades of effort. Potential Competition INTERNATIONAL MARKETING A market or market segment characterized by strong competition may be a segment to avoid or one in which to utilize a different strategy. and so on. Fuji quickly made inroads by introducing a number of new film products targeted at the “advanced amateur” segment that Kodak had neglected. Selecting a Global Target Market Strategy 11. In addition. In addition to offering traditional types of 3Smm film at prices below Kodak’s. Inca Kola is as popular a Coca-Cola. by virtue of its size.250 people. 3. 1. Even with the market in China growing at an annual rate of 33 percent. competition.2 © Copy Right: Rai University . For example. Compatibility and Feasibility Global Targeting As discussed earlier.000 Chinese.18 The multinational might try more or different pro. magnetic resonance imaging (MRI). in medical imaging there is X-ray.S. having entered in 1972. One company decided to take a different approach and segment the same market by the health care delivery system: national research and teaching hospitals. and compatibility with the company’s overall objectives and the feasibility of successfully reaching a designated target. Criteria For Targeting The three basic criteria for assessing opportunity in global target markets are the same as in single-country targeting: current size of the segment and anticipated growth potential. then the final consideration is whether a company can and should target that market. In many cases. It then rolled out a campaign that was regional. The opportunity for automobile manufacturers is eyen greater. There are currently only about 3 million credit cards in circulation. even a narrow segment can be served profitably with a standardized product if the segment exists in several countries? The billion-plus members of the global “MTV Generation” constitute a huge market that. does it have high growth potential so that it is attractive in terms of a company’s long-term strategy? Indeed. which was tailored for each different type of health care delivery. Current Segment Size and Growth Potential Is the market segment currently large enough that it presents a company with the opportunity to make a profit? If it is not large enough or profitable enough today. Consider the growth opportunity in financial services for example. Nestle discovered that cat owners’ attitudes toward feeding their pets are the same everywhere. Although Pepsi was firmly entrenched in the Russian market. used by businesses. This approach can achieve excellent results by virtue of marketers’ superior understanding of the problem a product solves or the benefit it offers. regardless of geography. a pan-European campaign was created for Friskies dry cat food. mostly 122 If a global target market is judged to be large enough. Coke waited. whereas the segment in a single-country market might be too small. 15 years to n1ake its first move in Russia and 20 years before it decided to make major investments. 2. reaching global market segments requires considerable resources such as expenditures for distribution and travel by company personnel. For example. In Peru. In the Siberian city of Krasnoyarsk. Targeting is the act of evaluating and comparing the identified groups and then selecting one or more of them as the prospect(s) with the highest potential. Kodak’s position as the undisputed leader in the $2. Part of the problem is Kodak’s distribution clout: Kodak is well entrenched in supermarket and drugstore chains.4 billion U. government hospitals. The appeal was that dry cat food better suits a cat’s universally recognized’ independent nature. Meanwhile. Despite its early successes. is extremely attractive to many companies. Low product saturation levels are also found for personal computers. one car for every 20. and finally global. The ratio in the United States is approaching one computer for every two people.625. China represents an individual geographic market that offers attractive opportunities in many industries. Kodak has spent half a billion dollars in Japan. China has 1.motions or may acquire the local company or form an alliance with it. In response. and so on. Thumbs Cola is a major brand. Often a local brand may present competition to the entering multinational.2 million passenger cars. Another question is whether the pursuit of a particular segment is compatible with the company’s overall goals and established sources of competitive advantage.Benefit Segmentation Global benefit segmentation focuses on the numerator of the value equation-the B in V = B/P. by 1996 Coke’s market share had reached 50 percent. In India. Kodak has agreements with dozens of American amusement parks guaranteeing that only Kodak film will be sold on the premises. one of the advantages of targeting a market segment globally is that. These price points were the traditional way of segmenting the medical imaging market. but because of the size of the Coke investment and the skillful execution of its investment moves in Russia. Each modality has its own price points. there is one computer for every 1. a tremendous potential market still exists. A marketing mix is then devised that will provide the organization with the best return on sales while simultaneously creating the maximum amount of value to consumers. and if strong competitors are either absent or not deemed to represent insurmountable obstacles. computed axial tomography (CAT)” scan. Crazy Cola has a 48 percent share of the market. the world’s second-largest market for photographic supplies. Pepsi had 100 percent of the Russian cola market. This horizontal segmentation approach worked as well in markets outside the home-country launch market as it did in the home country.

a scaled-down version. It focuses exclusively on dishwashers for hotels and restaurants. detergents. This strategy calls for extensive distribution in the maximum number of retail outlets. marketers of Hugo Boss for men and Laura Biagiotti’s Roma perfume. It entails targeting two or more distinct market segments with different marketing mixes. up from $400 million in 1996. which competes directly with the Jeep Grand Cherokee.000 units for the 1999 model year. non-U. lower production costs. savvy export marketing has en-abled HarleyDavidson to dramatically increase world. Harley enthusiasts are paying the equiva-lent of up to $25. higher quality and greater effectiveness of marketing communications. uses the appeal of youthful fun in its global advertising. and greater profitability. marketers use positioning. a decision is made to proceed. this approach has been used successfully by the House of Lauder Channel and other cosmetics houses that target the upscale prestige segment of the market. the Swiss Watch Company. Differentiated Global Marketing The third target marketing strategy is a variation of concentrated global marketing. In the cosmetics industry. so why should we try to confuse them?” Can global positioning work for all products? One study suggests that global positioning is most effective for product categories that approach either end of a “high-touch high-tech” continuum. known for its Old Spice and Incognito brands.000+ Range Rover at the high end of the market. Standardized Global Marketing from the Swatch fashion accessory watch at $50 worldwide to the $100. Its sponsorship program is global and is adapted to events that are popular in specific countries such as soccer in -other parts of the world versus foot ball in the United States. in the United States and nine European countries.625. This is the strategy employed by the hidden champions of global marketing: companies that most people have never heard of that have adopted strategies of concentrated marketing on a global scale. water conditioners. also embarked on this strategy with its 1991 acquisition of Revlon’s EuroCos. They can only know one Chase in their minds. From Australia. It offers dishwashers. to Germany to Mexico City. school. The appeal of standardized global marketing is clear: greater sales volume. sales exceeded $537 million. For example. 1.2 © Copy Right: Rai University 123 . For example. Although the research and development (R&D) and manufacturing at SMH are integrated and serve the entire product line. Global Marketing in Action-targeting Adventure Seekers with an American Classlc Over the past decades.wide sales of its heavyweight motorcycles. INTERNATIONAL MARKETING Standardized global marketing is analogous to mass marketing in a single country. Chase Manhattan Bank launched a $75 million global advertising campaign geared to the theme “profit from experience. company.000. In cosmetics. Uni-lever targets the luxury market with Calvin Klein and Elizabeth Taylor’s Passion.000 to own an The second global targeting strategy involves devising’ a marketing mix to reach a single segment of the global market. in the segment of sports-utility vehicles (SUV). and $115 million in 1989.” According to Aubrey Hawes. 2. sold a dishwasher to a consumer. To achieve this task. after evaluating the identified segments in terms of the three criteria presented earlier. and Rover has a concentrated strategy for each. They go for global depth rather than national breadth. Both ends of the continuum are characterized by high levels of customer involvement and by a shared “language” among consumers. For example. One of the world masters of differentiated global marketing is SMH. 3.If. Cosmair sells Tresnor and Giorgio Armani Gio to the upper end of the market and Gloria Vanderbilt to the lower end. one of the most powerful tools of marketing is not something that a marketer can do to the product or to any element of the marketing mix: Positioning is what happens in the mind of the customer. Wind Song and Brut are its mass-market brands. By 1999.S. each SMH brand is managed by a completely separate organization that targets a concentrated. The position that a product occupies in the mind of a customer depends on a host ofvariables. many companies find it increasingly important to have a unified global positioning strategy.000 motorcycles in 1983 to 32. a vice president and corporate director of marketing for the bank. and differentiated marketing. Now. pursue differentiated global marketing strategies by targeting both ends of the perfume market. These companies define their markets narrowly. narrow segment in the global market. Uni-lever NV and Cosmair Inc. Rover has a $50.000+ Blancpain. In today’s global market environment. Coca-Cola. Juergen Winter halter commented in reference to the company’s narrow market definition: “This narrowing of our market definition was the most important strategic decision we ever made. SMH offers watches ranging 11. After the global market has been segmented and one or more segments have been targeted it is essential to plan a way to reach the target(s}. an appropriate targeting strategy must be developed. Thus. Chase’s business and private banking clients “span the globe and travel the globe. P&G is launching a new prestige’ fragrance. Export sales increased from 3. This strategy allows a company to achieve wider market coverage. winter halter (a German company) is a hidden champion in the dishwasher market. It involves creating the same marketing mix for a broad market of-potential buyers. but the company has never. Mass marketer Procter & Gamble (P&G). many of which “are controlled by the marketer. if done well. one of the world’s most global brands. These are two different segments. concentrated marketing. It has also never sold a dishwasher to a hospital. Concentrated Global Marketing Global Product Positioning Positioning is the location of your product in the mind of your customer. and service. the Land Rover Discoverer is priced at under $35. or any other organization. There are three basic categories of target marketing strategies: standardized marketing. The same is true of standardized global communications: lower production costs and. Venezia. It is the very foundation of our success in the past decade.

Special-Interest Products Although less technical and more leisure or recreation oriented. such as American cyclists passing a rickshaw carrying a geisha. However. Despite high levels of demand. While biking through Europe.” Ads that show friends talking over a cup of coffee in a cafe or quenching thirst with a soft drink during a day at the beach put the product at the center of everyday life and communicate the benefit offered in a way that is understood worldwide. Marlboro. the company inten-tionally limits production increases in order to uphold Harley’s recent improvements in quality and to keep the product supply limited in relation to demand. 1. require a great deal of product information. Mercedes is the embodiment of legendary German engineering. so Harley encourages its dealers to hold open houses at their dealerships. “Enough motorcycles is too many motorcycles. Recalls Wilke. designer fashions. Japan is Harley-Davidson’s largest market outside of the United States. juxtaposing images from both Japan and America. high priced products that often enhance social status. and Canon cameras . Harley’s international success comes after years of neglecting overseas markets. Products That Use Universal Themes High-tech Positioning Personal computers. In Japan. and products with a. By the late 1980s. global village products. In consumer electronics. chemicals. This required the company to investigate design changes to create a smoother ride at autobahn speeds. Fragrances and fashions have traveled as a result of growing worldwide interest in high-quality. 1. Wilke also learned that German bikers often travel at speeds exceeding 100 miles per hour. Toshifumi Okui.” says Jerry G. president of Harley’s Japanese division. In many countries. The Harley shortage seems to suit company executives just fine. universal theme. In global markets. although image may also be important. 2. Additional themes are materialism (keyed to images of well- 124 © Copy Right: Rai University 11. Sony is a name synonymous with vaunted Japanese quality. The “American-ness” of Levis. Fuji bicycles. rallies are less common in Europe than in the United States. Today. Technical Products INTERNATIONAL MARKETING Computers. Again. after recruiting dealers in the important Japanese and European markets.are examples of successful global special-interest products. Harley opened two ‘stores specializing in clothes and bike accessories. Buyers typically already possess or wish to acquire considerable technical information. special-interest products. Buyers of high-touch products also share a common language and set of symbols relating to themes of wealth. After learning that riders in Tokyo consider fashion and customized bikes to be essential. Patterson. Wilke.S. and demonstrable products. the company was basically involved in export selling. Okui finally convinced Milwaukee to allow him to launch a Japan-only advertising campaign. Such products are frequently purchased on the basis of concrete product features. Global Village Products Channel fragrances. mineral water. Products That Solve a Common Problem At the other end of the price spectrum from high tech. modems. “One steady constant in an in-creasingly screwed-up world. only 18 percent of its production goes outside the North American Division. print advertising simply used word-for-word translations of the U. 3.American-built classic. He worried that the tag line from the U.” did not connect with Japanese riders.S. 20-gigabyte hard drives. 2. tires.2 . high-touch categories are highly involving for consumers. special-interest products also are characterized by a shared experience and high involvement among users. Marketing communication for high-tech products should be informative and emphasize features. “People asked us why we were ending the rally just as the evening was starting. Moreover. Early on. and romance. where beer and live rock music were available until midnight. and Harley-Davidson enhances their appeal to cosmopolitans around the world. Harley began to adapt its international mar-keting. “As the saying goes. The company sponsored a rally in France. Harley is till careful to make home-country customers a higher priority than those living abroad. making it more responsive to local conditions. however. we needed to think global but act local.M. High-tech products may be divided into three categories: technical products. products in-this category provide benefits linked to “life’s little moments. the lower-priced food products just mentioned show that the global village category encompasses a broad price spectrum. the common language and symbols associated with such products can transcend language and cultural barriers. High-touch Positioning Marketing of high-touch products requires less emphasis on specialized information and more emphasis on image. and pizza are all examples of products whose positioning is strongly cosmopolitan in nature. ads. dealers must put would-be buyers on a six-month waiting list because of high demand. Notes Harley’s James H. Still. some advertising themes and product appeals are thought to be basic enough that they are truly transnational. and automobiles are examples of product categories in which high-tech positioning has proven effective. video and stereo equipment.” Still.625. So I had to go persuade the band to keep playing and reopen the bar until 3 or 4 A. Harley’s rugged image and high quality helped make it the best-selling imported motorcycle. vice president for worldwide marketing. company executives discovered a basic principle of global marketing. ads. Adidas sports equipment. As noted earlier.” Computer buyers in Russia and the United States are equally knowledgeable about microprocessors. thus. and financial services are just a sample of the product categories whose buyers have specialized needs. materialism. and share a common “language. was not satisfied. in automobiles. Like high-tech products. Harley’s German marketing effort also caused it to begin focusing on accessories to increase rider protection. products may have a global appeal by virtue of their country of origin. The three categories of high-touch products are products tJ1at solve a common problem. highly visible. Harley discovered that in Europe an “evening out” means something different than it does in America. symbolized by its underdeveloped dealer network. and RAM (random access memory). for example.

BMW publishes BMW Magazine for BMW owners. companies must plan a way to reach their chosen target market(s) by determining the best positioning for their product offerings. could simultaneously be classified as technical and special interest. Which market segments has Amazon served? Are the Amazon target market segments in the United States and the rest of the world identical? INTERNATIONAL MARKETING Summary The global environment must be analyzed before a company pursues expansion into new geographic markets. Demographics. The identified groups are evaluated and compared. The group are evaluated on the basis of several factors: segment size and growth potential. play (leisure/recreation). behavioral characteristics.625.com has been an early winner in the on-line book business. Global tobacco companies are shifting their focus from high-income to emerging markets where the combination of rising income and the absence of antismoking campaigns is leading to ever-increasing demand for cigarettes. After evaluating the identified segments. the similarities and differences of potential buying customers can be identified and. the prospect(s) with the greatest potential is selected from them. within either the high-tech or high-touch poles of the continuum. heroism (themes include rugged individuals or self sacrifice). and differentiated marketing. In addition to articles on the technical characteristics of the car.2 © Copy Right: Rai University 125 .being or status). After marketers have identified segments. and describe the global segments for this market. 2. and jewelry. High-tech and high-touch positioning are two strategies that can work well for a global product. A BMW car. marketers devise an appropriate marketing mix to fix the product in the mind of the potential buyers in the target market. 4. the next step is targeting. psychographics. What is a global market segment? Pick a market that you know something about. 11. income. if anything. and benefits sought are common attributes used to segment world markets. and procreation (imagesof courtship and romance). should residents in high-income countries do about the rise in smoking in emerging markets? Discussion Questions 1. Smoking is on the decline in high-income countries where the combination of higher life expectancy. the magazine has lifestyle articles and advertisements for luxury products such as expensive watches. concentrated marketing. Is this shift in focus by the global tobacco companies ethical? What. Amazon. It should be noted that some products can be positioned in more than one way. To reinforce. Here. marketers must decide on an appropriate targeting strategy. The three basic categories of global target marketing strategies are standardized marketing. the high-touch aspect. Through global market segmentation. and legal action has created a powerful antismoking campaign. Identify the major geographic and demographic segments in global markets. and compatibility and feasibility. Finally. 3. for example. education. competition. grouped.

Allgemeine Schweitzer Uhren AG (Asuag) and Societe Suisse pour I’Industrie Horlogere (SSIH). gave every indication that the Swiss watch industry was back on its feet after struggling for much of the previous decade. Gazing from his privileged place on the dais. is that the Swatch watch had given new life (and increased market share) to an industry that was recently engaged in a very difficult struggle with Asian competitors.. supplemented their incomes by assembling mechanical watch parts during the winter months. Singapore. accounting for only 2. In 1974 Swiss watch exports still accounted for 60 percent of the worlds total. In 1985. the Swatch watch. Success had been most notable in the United States. and they displayed a noticeable lack of marketing creativity. there were 2. The competition. now attribute the decline of the Swiss watch industry to too many Background-the Swiss Watch Industry 1985 was a good year for the Swiss watch industry. Over 10 million of its brightly colored. but not at all his style. Most observers. A mechanical watch is an intricate piece of machinery whose assembly necessitates a highly skilled workforce. the Swiss suddenly found themselves faced with strong competition from Japan and such low wage producers as Hong Kong. where Swatch’s latest move was the launching of a diversification program aimed at making the company a total fashion enterprise. The comeback had been led by the success of Swatch (a blend of Swiss and watch).INTERNATIONAL MARKETING TUTORIAL C SWATCH WATCH U. the Swiss were late and reluctant entrants into a new market whose rules were different. Some might say that the Swatch watch was just another in a long line of Swiss successes. The Swiss luxury watch market was still healthy.1 percent of total shipments but 41. In the 1950’s. Whether or not this expansion of the Swatch product line proved successful remained to be seen.000 new jobs were created. president of Swatch Watch U. few other industries enjoyed the domination known by the Swiss watch industry. they were low to accept ‘e importance of the new technology.1 million and the value of watch exports increased by 12. Imgruth saw an audience that was content to rehash past successes for a night.332 such maisons.S. For the first time in 15 years. The Swiss continued to produce watches whose styles were no longer in touch with consumer de-mands. After having ruled supreme over the watch industry for decade. grew more and more uneasy. combined with a strong year in 1984. watches were introduced to mass outlets such as department stores and supermarkets. The industry’s good performance in 1985. Taiwan. gave it a head start in what had become a vast new market-the low prices watch as a fashion accessory. Imgruth had recently guided his company through a fast paces and. Even though it was the Swiss who introduced the first electronic quartz watch in 1968. Max Imgruth. however. doubling as skilled watchmakers. controversial diversification program. some would say. Economic recession and a sharp rise in the value of the Swiss franc played a part in the industry’s problems. The Swiss remained industry leaders until the mid 1970’s when the mass production of electronic watches changed the watch industry forever. In 1970s. which was at first slow to react.: CREATIVE MARKETING STRATEGY Introduction As speaker after speaker paid tribute to the extraordinary skills that had earned him the award of “Marketing Executive of the Year”.A.S. By 1979. What was also clear is that Swatch’s willingness to break with convention. Having already achieved spectacular success with the Swatch watch. had begun to implement strategies that stood to erode Swatch’s position. but they had lost a huge amount of market share at the lower end of the market. Two large watchmaking groups. The most important difference between an electronic watch and a mechanical watch is that the former is much easier to manufacture. Fully confident that the product that changed the watch industry forever. His next objective was to make sure that this year’s #1 marketing executive did not become one of the decade’s more memorable disappointments. the Swiss represented about a third of the world’s watch ex-ports. This was nothing short of blasphemous to the proud Swiss who required their watches to be sold in approved watch and jewelry stores. would enjoy continued success. 126 © Copy Right: Rai University 11. the Swiss raised their share of the world market to 10 percent by volume (number of units sold) and 45 percent by value. This move was accompanied by a good deal of skepticism from colleague and competitor alike. These newcomers produces inexpensive watches with digital faces that were more accurate than mechanical watches. In any event. the Swiss possessed an estimated 80 percent share of the (non-Communist) world watch market. an increase in employment was registered as 1. What was certain. At the industry’s peak in 1956.2 . Imgruth nonetheless felt the need to change gears. Imgruth spearheaded a plan to establish Swatch as a total fashion enterprise. The electronic watch is typically composed of microchips and printed units and lends itself well to mass production and automated processes.8 percent of total earnings. which was nice. In that decade. for example. especially in the area of marketing strategy.A. the Swiss had ceased to be leaders in the watch industry. The number of finished watches shipped abroad rose 41 percent to 25. plastic wristwatches were sold worldwide in 1984-85. Luxury watches still comprised the backbone of the Swiss watch trade. on the other hand.2 percent. controlled most of the Swiss brands at this time. Production was centered in the Jura region where snowed-in farming families. and Korea. Hindsight suggests that small and fragmented producers had a vested inters in keeping things as they were-the new technology Wt still unproven in the marketplace and the Swiss proposition was secure.625. In reality.

Such stores never used to handle Swiss watches and still only account for 10 percent of all watches sold. shockproof. Battery life is estimated to be three years. cool and clean high style. waterresistant (up to 100 feet). each geared to a specific element of the four-tiered product mix. electronic watch with a plastic band that use’s a quartz analog (with dial and hands) movement. Imgruth 127 The Merger of Asuag-ssih The merger of Asuag. Most of SSIH’s management was sacked and con-trol of the watch division was transferred to Ernst Thomke. and selling prices were set to enable even in-efficient firms to survive. Of course. with total retail sales increasing from $3 million in 1983 to $150 million in 1985. There are four campaigns running simultaneously. By 1983. Distribution Distribution was originally limited to fashion outlets and now includes upscale depart-ment stores such as Bloomingdale’s. Swatch. which was especially successful in the United States. describes its target market as “fashion. and Classic.years of unqualified suc-cess that gave it an aura of invincibility. and SSIH. was a sensible move be-cause Asuag was far better technologically equipped to face the 1980s than SSIH. sometimes 12 months.1981. concentration. The result was the Swatch watch. In 1976. Design. which represents a substan-tial markup on cost. Product Description The Swatch is a lightweight (3/4 ounce). to create collecting and spur multiple ownership. tradition-breaking decisions in his first year. Every face is only out a restricted amount of time. The new group was granted a fi-nancial package worth $310 million. SSIH. Asuag-SSIH was renamed the Swiss Corporation for Microelectronics and Watch making Industries. was Switzerland’s first response to the Asian challenge. INTERNATIONAL MARKETING The Swatch Marketing Strategy Central to the marketing strategy of the Swatch watch is the notion of the watch as a fashion accessory. the shorter it will remain available. raspberry. finally began to adapt to the electronic age. What most 11. and so on. Saks Fifth Avenue. the more classic the design. Says Imgruth: “This is d6ne on purpose. and 12 larger ones. distribution. An essential feature of the fashion-oriented approach is a constant variety of product lines whose designs suit seasonal fashions. Generally speaking. only 686 maisons remained and overall employment stood at about 40.” One trend that worked in Swatch’s favor from the start is that. on the other hand. The merger. It is manufactured by robots and sealed by lasers in a state of the art factory in Switzerland.000 inhabitants were sold in America. No longer was the watch primar-ily a gift item and no longer was it only the rich who owned more than one. active and sporty. for its part. performance or. low-priced. his company’s strategy is divided into three elements: design. the trendier the design. the industry had a waiting list of months. Between 1980 and 1983. 2. As one watch ex-ecutive put it: Just imagine the situation in the early post-war years when the Swiss were the only people making and selling watches.000 in the early 1970s. According to Imgruth. who possessed both a med-ical doctor’s degree and an advance degree in chemistry. whose best-known brand is now Swatch but also boasts Omega and Tissot.to 24-year-olds. during the period 1976-1986.” Each line is given a distinct theme such as the “Cosmic Western” group which was described as a combination of Buck Rodgers and the Wild. and the corol-lary of fewer jobs. the company has “a clear product concept based on four directions: young and trendy. special versions of the Swatch Watch such as the $100 diamondstudded Limelight and limited edition art watches are added periodi-cally. Thomke made two important. a move that allowed Asuag-SSIH to improve its technological base through increased pro-duction. de-pending on the design concept of the watch. The first was to sell Swiss watch movements all over the world instead of restricting such sales to Switzerland. According to Imgruth.625. more and more people bought watches. on accessory features such as a stopwatch and/ or calculator. the seasons being spring/ summer/fall/holiday (see Ex-hibit 4). and production. Wild West. a rank outsider to the industry. technically ad-vanced and stylish. and the watch retails from $30 to $35. having already made a substan-tial commitment to the research and development of elec-tronic watches. as it turns out.2 © Copy Right: Rai University . and mint) have been tried. the structure of its watch making industry. About 90 percent of sales were composed of inexpensive electronic watches of vari-ous styles and brands. This meant rationalization of production. in the case of digitals in the late 19705 and early 1980s. This is a novel approach in that it is typically used as a selling point for gold. These four lines are available at all times. automation. 1. New models are introduced four times a year. representing the largest rescue scheme in the history of Swiss banking. There are 12 small-faced models. The watch is comprised of only 51 components (the average is 91). The second was to recapture the lower end of the watch market by developing a product that was inexpen-sive to manufacture.000 jobs. especially SSIH which had lost $77 million in the year ending March 31. whose flagship brand is Longines. distinguish the product is its design and its departure from convention. down from 90.240 watches per 1. Swatch never would have been able to take advantage of this trend without a sound marketing strategy.000 inhabitants. In addition. and diamond-studded watches at the higher end of the market. the longer it will remain on the market. Heavy reorganization took place in both groups.) Dr. Watches in the $30 to $35 range normally compete on the basis of price. production of watches dropped by 50 percent. The more efficient ones were making enormous profits. and is manufactured off a single assembly line (the Japanese use three). Macy’s. (In the summer of 1985. SMH in short. A wide va-riety of faces have been used and even glow in the dark and scented bands (banana. which lends itself well to the thin look that is currently in vogue. durable. which had more or less retained its form since the late eighteenth century. Ad-vertising media are chosen based on the product concept. Why would any manager in his senses want to change things? As Switzerland entered the 1980s. some-times only three months.oriented 12. possessed the better known brand names. Ten years later the figure was 425 watches per 1.

” In addition. and Nancy Kadner.625. The result was a four-watch-series called the Keith Haring Swatch. the very areas Swatch has shied away from. To gain an appreciation of just how different the Swatch strategy is.” Swatch produced 9. in Im-gruth’s words are “a collectible piece of art. Based on 1984 watch sales. In October 1985. has no formal business education. Swatch spon-sored the World Break dancing Championships. and June.000 locations in the United States. the new array of low-cost watches was certain to exert downward pressure on retail prices. Most drug retailers feel prices will eventually fall to the $12 to $14 range. company created over 470 “Swatch Shops” within major department stores na-tionwide © Copy Right: Rai University 11. Before Swatch entered the market. Rechtschaffner. Timex developed one of the more creative performance oriented campaigns in the early 1980s when it strapped a watch to an auto tire and proclaimed that the product “Takes a lick in’ and keeps on tick in’. May. 5.an eye to an increasingly competitive environment that Swatch embarked on a fast-paced diversification program-in-Iate. Customs and Asuag-SSIH quickly sued three Swiss imitators. He began his career by forming his own sports promotion business. In addition to imitating some of the very styling and advertising techniques that Swatch employs (Exhibit 6). Production.000 in order to maximize control over the sale of its products. Because the Swatch watch was such a novelty at its introduction. even though these are the usual paths for watches priced under $100.95 at full markup. For example.000 more would love to sell his products.scrupulously -avoids distributing through drugstores and mass merchandisers such as Sears and JC Penney. and the use of music videos and MTV. The production process described pre-viously makes the design strategy possible. as their primary points of distribution. it is not uncommon to see digital watch advertisements where product features are simply listed next to a black and white photograph of the watch. Ski Team and self-described workaholic who recently overcame a bout with thyroid cancer. Distribution is limited to 5. watches priced under $50 competed on the basis of price or performance. director of advertising. Swatch wanted an artist to help promote the break dancing championships so. the first being re-leased in December. The Haring watches were promoted under the banner of “Great Modern Art That Tells Time. New York’s 128 Under $10 $10--$50 Over $50 29% 52 19 for well over a year.1-98S. 3. the Fat Boys.” Others have not been so imaginative. and Parker Watch have entered the fray. spending an es-timated $500.S. although Imgruth claims that 5. prior to her work at Swatch she spent over 4 years in the marketing department at MTV. a glance at a typical advertisement for a low-priced watch would suf-fice. Such flexibility is absolutely essential because of Swatch’s product strategy. best-known graffiti artist. design runs of three months would be out of the question. for its part. While it remained to be seen if the new entries could match Swatch’s creativity and design flexibility (one Swatch insider said that technology-conscious Casio’s bid to enter the fashion watch market was “like John Deere getting into sport scars”).S. Swatch elected to buy up all such watches in 1985. It hired Keith Haring. and followed by new editions in April. Armitron. Normally. A good example of the Swatch strategy in action is its use of a rap music group and a graffiti artist to promote and develop its products.2 . Swatch has also had to concern itself with the sale of phony Swatch watches and unlicensed sales. or people lose their hunger for the product. the company had free reign over the plastic fashion watch market (some have called it “cheap chic”) Swatch Marketing Strategy In Action In view of the fact that Swatch’s strategy is unorthodox. It employs the use of color-ful (and often humorous) print ads. All advertising.95. vice president/marketing. Design changes for other watch-makers typically require a substantial capital investment whereas Swatch can make changes without adding cost. watch sales (see Exhibit 5). As one Swatch executive puts it: “You have to control distri-bution and not flood the market. this segment of the watch market also was responsible for the large majority of all U. and a sturdy timepiece. Timex’s Fun Timers sold for $17. multi-page advertising inserts in magazines such as Vogue and Rolling Stone. the watch is placed against a background in the hope that the right message is communicated. In September 1984. marketing. The picture has now changed consid-erably as strong competitors in the under $50 segment such as Casio. has taken roads previously UN traveled by watch producers. Swatch. As for Kadner. the Human Beat Box. it is not at all surprising that its marketing executives would look out of place in most corporate boardrooms.” The watches were introduced in separate months. Rechischaffner and Kadner are the creative forces behind Swatch’s novel marketing strategy. Without it. con-cert and event sponsorship. Lorus. The flexibility that Swatch enjoys is unknown else where in the industry. the new competition has targeted drug stores and mass retail outlets.000 fakes were uncovered by U. There is also a thriving “gray market” in which unlicensed traders exploit price differences between the United State’s and Europe (the watch sells at a lower price in Europe). One of the participating rap music groups. Timex. and promotion activities are handled by 27 –year old Steve Rechtschaffner.95 and Casio’s color Burst line started at $19. INTERNATIONAL MARKETING The Competition The under $50 watch segment is the most competitive in the watch industry in terms of the number of companies involved. The Next Step: Swatch As A Total Fashion Enterprise It was perhaps with . was hired to do a commercial on MTV on which its lead singer. Lorus’ initial line of plastic watches sold for $19. The. incessantly chants “BrrrSWATCHUM ha ha ha SWATCHUM.999 of each edition. Each watch is numbered and. a former member of the U.S. a distinctive fashion accessory.

miniaturized engine. small.” Furthermore. The Swatch drive to open shops within major de-partment stores is based on management’s conviction that products should be sold in a total Swatch environment-an environment that has the Swatch “personality. (See Exhibit 1. Swatch Chums. the car was to emit almost no pollutants. which can be changed in less than an hour. a new brand. has a 22-liter gas tank. It is named “Smart” and is certainly distinctive looking. There are Swatch Shields. Like Swatch. creative company. It seats two adults or one adult and two children. A Nike spokesman looking back at that experience notes: “When you’re tremendously successful in one area. to delegate authority’ to younger executives.” The com-pany president. for better or worse. Fun wear is described as “‘a bright and whimsical line of unisex casual wear includ-ing shorts. color-ful devices that cover watch faces. Fun gear is a collec-tion of leather and rubber knapsacks. big shirts. The op-tional leather seats are papaya colored. Why has the com-pany been so successful? Was it important that the Swiss watch industry recapture the lower end of the market? Why? Why not? 2. Hayek noted that safety would be a key selling point. and a very consumer. which successfully expanded from a producer of home furnishings to a retailer of everything from towels to desk lamps. Another example of fail-ure is that of Nike. and 1. Swatches own marketing and design people will introduce new collections every eight weeks. Swatch. In 1998. as the Swatch watch was the initial inspiration for developing this car. and boomerang blue. tank tops. Swatch also imports and markets pens. belts. using a highly efficient. The new product groups are aimed at the same fashion-oriented 12.selling. It has a frame called the Tridion Safety Cell. in such colors as mad red. and umbrellas and sweats that fea-ture current watch designs. On the other side of the coin. slip-on pants.” The Swatch mobile concept was based on Nicolas Hayek’s (Chairman of SMH) conviction that consumers be-come emotionally attached to cars just as they do to watches. What do you think of Swatch’s chances for success as a total fashion enterprise? Do you agree with management’s extension of the Swatch brand name. taking into account such practices as the willingness to bring in people from other industries.515 mm wide. In the early stages of the project when Daimler-Benz and SMH (maker of the Swatch watch) formed a joint venture. Swatch Guards. scodic blue. Like the. What lessons can be learned from their experience? INTERNATIONAL MARKETING Smart Car In 1998. In this way they could avoid the fate of Bill Blass chocolates. Conran’s started out catering to the needs of young people and. and a new technology in nine ED countries. One of the more infamous exam-ples is that of Bill Blass. shortly after the introduction.) The Smart car is only 2. In the long term. and gets 100 kilometers per-4. and to employ new media such as rock concerts and music videos. Do you see any parallels between the decline of the Swiss watch industry and other Western industries? 3.to 24-year-olds who are the target market for Swatch.friendly area to sit in. the car was called a “Swatch mobile. and safety razors. In order to keep its shops and continue to avoid head-to-head competition with more established companies. Swatch had to remain a trend-setting. Swatch created a new market-can they continue to expand that market? What must they do to defend their position in this market? 5.8 Liters. there was the example of Conran’s. you are correct. leaving the consumer with what might be a choice easily made. Evaluate the cultural dimension of the Swatch story. key rings. Hayak was “disillusioned” with Other Examples of Brand Transfer There are several examples of companies that have attempted. If you are thinking that the interchangeable panels and the wild colors remind you of a Swatch watch. and beachwear.500 mm long. His vision was of high safety. Swatch is a unique success story. Swatch is a classic example of marketing success through creativity. ecology. which comes in anthracite or silver color. green. hello yellow. the joint venture between SMH and Daimler-Benz ended when Daimler-Benz bought out SMH’s stake. or orange. a new ready-tower line called “Fun wear” and an accessories line called “Fun gear” Swatch will continue to’ employ the same strategies that’ it uses to sell its watches. and stylish. durable. declaring. Swatch offers more than just the preceding two prod-uct lines. Prices range from $10 to $65. bags.529 mm high. notebooks. which were sometimes found placed next to boxes of Godiva choco-lates. with the United States accounting for about half the market.’” Each collection has a theme that ties in with a Swatch watch theme. address books. Discussion Questions 1. he expects the new product lines to account for the majority of Swatch sales. when expansion took place. Another point in Swatch’s favor was its Swatch Shops.2 © Copy Right: Rai University 129 . The Smart car weights 720 kg. and prices range between $10 and $50. who put his name on chocolates only to see the idea fail miserably. thanks to its electric engine: The car would also be capable of gasoline-powered opera-tion. which spared the com-pany from having its new product lines being placed on shelves next to competitors who had the advantage of an es-tablished image as quality producers of ready-to-wear.625. Daimler Chysler introduced a new car. which are eyeglass holders. which is a backpack containing a windbreaker and a hood. and removable panels. Max Imgruth. the Swatch mobile was to be affordable. which unsuccessfully expanded its col-lection of footwear to running wear and leisurewear. 11. stayed with the same target market. Hayek predicted worldwide sales would reach 1 million units. It is always two -toned in color. “This car will have the crash security of a Mercedes. has predicted that ready-tower and accessories will represent from 30 percent to 40 percent of total 1986 sales. which are described as high-fashion sunglasses. there’s a tendency to develop an arrogance about your ability to transfer the value of a brand name. 1. T-shirts. to other products? Why? Why not? 6. jack black. and the jacket pack. not neces-sarily related products. aqua orange. 4. to build on the success of its first product by using its brand name on other. in addition to watches.

To date. What do you think of the market potential of the Smart car? Comment on the original premise that a car could be the byproduct of the joint -venture of an automobile manufacturer and a non-automotive marketer. they are concerned about the price-value relationship. there were reports of several accidents. it originally sold for $10. Is the Smart car an international or a global prod-uct? Do you agree with the European-only launch? Why? Why not? 3. 2.2 . Should the price. Identify target markets where you would introduce this car. Smart car has two major criticisms: safety and price. and Daimler-Benz found Hayak diffi-cult to work with. Although many buyers of the Smart car have high incomes or already own two cars. INTERNATIONAL MARKETING Discussion Questions 1. What sequence of countries would you recommend for the introduction? 4. Despite development of a crash management system that “enables smaller cars to be just as safe as larger ones.500. How would you position the Smart car in the target markets? 5. After a period of disappointing sales in Italy and France.625. In response. be reduced? 130 © Copy Right: Rai University 11. the price was reduced to $9. As for the price.Daimler-Benz.” during its first winter (1999) on the road.300. assuming it would still make a profit. Who are the Smart car’s major competitors? How are these products differentiated? 6. the company developed “Trust Plus” a software package that will cut power if the wheels start to slip.

The organizational structure of a country sales company is shown in Exhibit 1. was established in 1990 with the objective of penetrating Eastern European markets. skin care is a large sector in most countries. with concentration on the impressive development of Oriflame’s entry into Eastern and Central Europe. Oriflame develops and produces its own naturally based products in its manufacturing plant in Ireland where the group’s research laboratories are also located. which was already a substantial industry in the United States by 1920. The Market The market for cosmetic products is developing positively with recent growth averaging around 4 percent per year by volume.Over all. A special focus will be directed toward oriflame’s operations in Poland. the natural cosmetics company Fleur de Sante became af-filiated with the group. the parent company. The current trends are returning to -personal service. Norwegian. as with other consumer industries.INTERNATIONAL MARKETING ORIFLAME Introduction This case will give you a general overview of the Swedish cosmetic company. The products are retailed through Swedish.1967 by brothers Jonas and Robert af Jochnick and Bengt Hellsten. Body care products continue to perform well in Europe. Oriflame Eastern—Europe S. In 1987.” are expected to become a major growth area in the skin care market. OISA became listed on the London Stock Exchange. direct sales of cosmetics account for 10 to 15 percent of the entire cosmetics market. and Icelandic pharmacies. Pan. was established. which are not just cosmetic. the Far East.A. and growth through the year 2000 is projected to reach the modest rate of 3 percent annually. Norway (4). Lux-embourg. In addition to Europe. Oriflame International S. Oriflame’s operations on the South American continent are directed from Chile. Hol-land (6). although. Although there is a continuous search for innovation in the C&T sector. growth in 1992-1993 decreased as a consequence of the general eco-nomic recession. Many people find vis-iting a department store tiresome and impersonal. The global market for cosmetics and toiletries (C&T) is mature. ACO Hud was acquired in 1992 and is Sweden’s bestknown brand name in skin care products. with the quality demands on effective longlasting moisturizers rising. except in the United States where skin care is less developed than in Europe in terms of user pen-etration. “cosmeceuticals.. sales totaling $230 million for the group. In 1992. the U. Company Profile Oriflame was founded in Sweden in.2 The Direct-selling Industry Direct selling.A. (OISA).625. also allowed for rapid market development outside the Nordic area. major growth has come from South and Central America. spending heavily on research and development (R&D) and often transferring medical research to cosmetic products. The company has experienced steady growth in sales since the start in 1967 with. The public’s in-creasing concern about environmental pollution and the link to the harn1ful effects of the sun’s ultraviolet rays is also of great interest to the industry. direct sales accounted for 83 percent of the group’s sales (DRESA and OISA). United Kingdom (15). is defined by the Direct Selling Association as follows: © Copy Right: Rai University 131 . and attention. The company is currently repre-sented in 42 countries in Europe. Oriflame International S. This trend can be seen across the cosmetic mar-kets and indicates that demand is becoming more sophisti-cated. care. The cosmetics industry has been very active in the development of such products in recent years. market is saturated and growth is slow. (ORESA). In 1972. Eastern Europe (11). The growth trend continues in the area of antiaging products. which is managed from Brussels. It usually involves a close association with health benefits. and the Americas. 11.European sales of skin care lines increased by 8 to 10 percent during 1992.A. France (7). Oriflanie is represented by sales companies in 42 countries of which 29 are wholly owned and mainly located in Europe Oriflame has licensees operating in an additional 13 countries. Europe ac-counts for 37 percent of overall sales and is the major single market for C&T products. Oriflame’s specific market concept. One key trend is the launch of products that are marketed as having benefits to the skin. the lack of legal protection in such forms as patents adds a factor of increased risk and hinders the potential for return on capital. In 1994. Australia. The increase has been particularly significant in Europe with the establishment of new oper-ations in Central and Eastern Europe.S. In 1982. Combine that with Oriflame’s commitment to offering value for money with a full 100 percent money back guarantee and the current sales growth is explained. which involves direct sales. Cosmetics sold through direct -selling methods make up the following percentages of the following markets: Sweden (20). other (13). By contrast. the mail-order operation was expanded fol-lowing the introduction of the Vevay brand name. Finland (13). but market penetration levels are relatively low compared to the sun care market. in June 1994. Denmark (11). In the global market for C&T. Spain (7). The growth rate in the region is among the strongest of any in the world when the results from Eastern Europe are considered. This growth is also explained by the fact that pe9ple are becoming more dis-cerning about how they buy things. These therapeutic cosmetics. where the success of the local operation continues.

As an example. and then pass products on to indi-vidual customers. Historically. If he wants to make more.) Oriflame’s selling method consists of selling a wide range of the highest-quality cosmetics to consumers on a person-toperson basis. 12 million catalogs in 17 languages are distributed every year. Depending on the number of people he recruits and on the volume of goods he and the recruits buy. a nice trip abroad. This involves the distributor’s building up a sales network and receiving a bonus or commission on the sales made by each individual recruited to be a distributor. This method is referred to as the pos-itive option. Catalogs are an integral-part of this system. receive bundled ship-ments from Oriflame. Over time. with 30 million people involved in this activity each year. relatives. (More than. Direct selling has several advantages over shop retail-ing. This system. which is 20-30. thus. The method has worked most successfully for Oriflame in Latin Ameri-can and several Eastern European countries. The manufacturer does not have to support advertising costs to attract its customers. (See appendix “The Marketing Plan: An Overview” for further explanations of the marketing plan. In a directselling environment.625. these positions are not neces-sary and profits are instead shared among the distributors. (2) receive free skin analysis and per-sonalized advice on proper skin care. The distributors playa double role being both customers and sales peopled in the recruitment of new customers. The rules are about the same everywhere. we will be buying 50-60 percent of all the products and services in this way. Distributors in these countries often enjoy incomes well above national averages. His first clients are his family and friends. and jobbers-earn a profit from handling the product. through transactions initiated and concluded by a salesperson. as well as creating training programs and materials to support the independent distributors. It is company policy that prospective cus-tomers (1) are not subject to “pressure selling” nor are they obliged to purchase. An au-thorized distributor delivers the company’s products directly to the customer’s house. Most of today’s successful direct selling companies use a sales system called Network Marketing or Multilevel Marketing. and colleagues-nor-mally. more competitive prices. These products are usually 15-50 percent cheaper than those purchased in the stores. he receives a commission and a bonus. but also because it is a good opportu-nity for them to develop an independent activity. but are issued less frequently. The company also makes money because it has no such costs as rent or a lease. Those who recruit the biggest number of new agents make the most. Direct sales accounted for 83 percent of Oriflame’s sales in 1994 com--pared with 70 percent in 1994. as well as on the sales made by the recruits. with many new players com-peting with traditional companies. the World Federation of Direct Selling Association indicated that direct selling was a $60 billion industry in the world. Distributors order products they sell from the catalogs. dis-tributors have been paid strictly on commission. A distributor buys the products at a price. cuttings also give Oriflame the possibility to sell a higher-quality product at lower. some’:’ times even a retirement pension. Oriflame has never been successful in the German and U. The difference is where his profit is. Networks sell all kinds of products: from pens or toothpaste to computers. but also for the manu-facturer. Oriflame is now implementing and expanding a new (for them) marketing method. he re-cruits new sales agents. not only for the customer. Dis-tributors usually have other jobs. Distributors get their catalogs every 2 to 4 weeks and use them to sell to friends. backed by a unique.2 . Sometimes it can be a prize. All these middlemen-wholesalers. It has been decided by the board of directors that Oriflame’s future direction will be in the field of direct selling. and even houses. Direct sales are now a global activity. shipping. their primary customer base. and market-ing.percent cheaper than the price the customer will later pay for them. In July 1994. cars. and (3) are offered free ongoing after-sales service. Oriflame’s responsibility in the markets in which it operates is to package the products and handle the financing and data processing. multilevel marketing plan. can offer career opportunities for current “hobbyists” because the system permits “main source” levels of income. Most people who sell direct do it not only because they like the products and want to in-crease their income. markets despite several start-up attempts.) INTERNATIONAL MARKETING Oriflame Direct Selling Conventional selling involves moving a product through a hierarchy of middlemen from the manufacturer to the end customer. These cost Other Activities Mail order at OrifIame can be divided into two types. value-added services such as cosmetics consultancy in their customers’ homes or offices. their involvement with Oriflame is sometimes only a hobby. in their homes and places of work. the United States counted million to 7 million people in direct selling and Japan more than 2 million. The Oriflame distributors offer unique. It would have to pay for all of this if it sold its goods in the stores. warehousing. By the end of this century.S.000 distributors worldwide. An article in The Wall Street Journal described Network Marketing in the following way: Network marketing is a sales system which totally omits the stores. This is where the company has its highest potential. The customer can pick up the products at a service center or have them delivered at home. The first is by direct customer purchase of specially selected products appearing in sales catalogs that are distributed 10 to 12 times a year. Oriflame will adapt this method for use in its traditional Western European markets. Oriflame has 300. 132 © Copy Right: Rai University 11. and their primary sales tool has been sales catalogs provided by Ori-flame. often called multilevel marketing. Oriflame is one of the main direct-sales companies in many of its markets and the largest direct-sales company in Scandinavia and in Central and Eastern Europe. retailers.The selling of consumer goods direct to private in-dividuals.

Oriflame’s board of directors decided to build a production plant on the outskirts of Dublin. in July 1979.522 13.822 16. recycling.349 16 57 32 14 1.556 23. Ire-land. The market as a whole is subject to tough competition from companies such as Yves Rocher. Oriflame Results In 1993 and 1994.2 © Copy Right: Rai University . and the Czech Republic. 1989. The production philosophy. Vevay was founded in Sweden in 1987.water used is tested daily to guarantee a high degree of micro-biological purity.192 37. Vevay. includes the ACO equipment transferred from Stockholm. products and pack-aging are tested continuously for microbiological stability and quality of packaging. In 1992. Sven Mattsson. The plant is one of Europe’s most modern cosmetic manu-facturing units and is well equipped with high-technology production equipment. The parcel is sent to the customers unless they actively inform the company that they do not wish to re-ceive it (negative option).000 meP1bers and sales of around $4 million. Since then. Kabi Vitrum. AlI Oriflame products undergo strict physical. Finland.The second category of mail-order sales is based on the book club type of system. Vevay has around 120. is to concentrate on new consumer de-mands such as biodegradability.800 square meters for production. The mail-order operations started in Denmark in 1978 with Oriflame’s cosmetics club.000 members and sales of around $8 million.406 31. in 1990.625. The mail—order market within the Oriflame group is composed of Oriflame’s operation in Denmark-Vevay’s cosmetic club and Fleur de Sante’s natural cosmetics.i c u i gt a s e so t c n l g f xesv rjc k n l d n r n f r f e h o oom r y former subcontractors. INTERNATIONAL MARKETING Exhibits – 2 1994 ($ Thousands) 232. The building cov-ered 2.The current extensions now have been completed and have increased the capacity for filling from 22 million to approximately 40 million units. In connec-tion with the nationalization of Swedish pharmacies in 1972. the factory covered 11. in-cluding packaging. The Research and Development Department has gen-erated over 100 new products for Oriflame.148 ACO The ACO company evolved from the Swedish pharmacy operations. The objective is that the customer should be able to rely on the product to provide long-term quality. and quality Oriflame Eastern Europe Decision to Start When Oriflame decided. The com-pany. Jonas of Jochnick called back to Europe a young Swedish manager.676 20. ACO’s main market is Sweden. Norway.000 square meters for production. 1992.206 28. following e t n i ep o e twor . Fleur de Sante has been an associate company of Ori-flame since May 1992 (36 percent ownership). op-erations have expanded to Norway. An overriding priority is to offer consumer products that meet the highest safety and quality standards. ACO accounted for 10 percent of total Oriflame sales. sun care products. research labora-tories.431 31. es-pecially in the Nordic area. and microbiological control before reaching the cus-tomer. In 1993. 1991-1992. This. Research and product development in the Dublin plant is actively concentrated on developing new cosmetic formulations in line with the market demands and expectations. to create Oriflame East-ern Europe. whereas the Nordic Light products compete with exclusive prestige brands The growth in sales during the year has mainly been through new products or recently introduced products as well as sun care products.328 1993 ($ Thousands) 192. Manufacturing At the end of 1977. has a turnover of around $15 million in Sweden. of course. and hand care products. The ACO products exist within the low and average price ranges.4 55 36 31 1. Oriflame in Denmark has around 100. Mail order in 1994 accounted for 7 percent of total Oriflame sales. Today. In August 1992. Fleur de Sante. located in Malmo. and the absence of animal raw materials. Extensions were made in 1980. control. The plant was completed 2 years later. Sales increased to $24 million. who at the time was managing director for the operations in the Philippines. where the products are sold through pharmacies. regardless of how it was purchased. Subscribers/members/cus-tomers are offered specially composed packages through a brochure. and Denmark and during 1993 ORESA started up its Will operations in Poland. A company was started in the Czech Re-public in February 1993. In order to attain this objective. and the name ACO dates back to 1939. the mailorder operations were combined to from a division within the Oriflame group.56 In production and development. and quality control. -Oriflame acquired the distribution rights for Fleur de Sante in Eastern Europe. The mail-order market accounts for around 5 percent of the total cosmetics market. Sales Operating profit Profit before tax Profit after tax Capital expenditure Profit margin % Equity/assets ratio (%) " Return on net capital employed (%) Gearing (%) Employees Exchange rate $ = 1. and 1992-1993. Its main products are creams. ACO was transferred to the government owned pharmaceuticals company.137 36. research laboratories. The. ACO is the best-known brand name for skin care products in Sweden. The activities in Eastern Europe have a major potential as the time is right for this concept and strong development is anticipated generally. Oriflame acquired ACO on January 1. Hungary. The 133 11. and ACO in 1994. the Oriflame Group results are shown in Exhibit 2. chem-ical. The market is expanding. and Finland. all deliveries of raw materials and packaging are tested according to strict specification before they enter the production process. lotions.

7% 167 37 450 800 4 44. It is therefore impossible to predict with any degree of cer-tainty what financial returns can be expected or the timing 9f such returns. In the longer term. ORESA was also examining the possibility of enter-ing into joint venture arrangements with existing cosmetic manufacturers in each of these countries to enable prod-ucts to be sourced locally. he wrote: The opening up of the Eastern European markets offers new and exciting opportunities to establish busi-ness activities in these countries. of service centers Advertising spending (USS in thousands) 1993 3197 3795 66% 180 10 280 0 0 23. ORESA. The Development 1990-1994 (Exhibit 3) The first country that Oriflame entered was Czechoslovakia. On July 10. of service centers Advertising spending (USS in thousands) 1991 1400 3602 65% 133 14 60 50 0 0 1992 6500 13442 62% 100 35 180 700 1 20 Start: April 1992 Country: Turkey 1991 Total sales (USS in thousands) Active file count Active %/month (average) Sales/active/month (USS average) No. With the resources to establish or invest in local manufacture.4 1994 12900 28550 47. together with Mattsson and a secre-tary.1990.3 Start: May 1993 Country: Greece 1991 1992 Total sales (USS in thousands) Active file count Activity %/month (average) Sales/active/month (USS average) No. and Poland. was made all offer to return to Prague. Eliska Wescia. In Eastern Europe. Oriflame targets for the later stage of its development were Bulgaria. In a letter to Oriflame shareholders. Hungary. future reward and returns should far exceed what can be expected from mature markets in the West. using the well-proven direct-selling techniques already used by the company in its existing markets. which take the initiative early and take a long-term view.year before.000 worth of sales were already made. Currently there is a high degree of uncertainty as to where and how quickly these opportunities will de-velop since definite legal frameworks have not yet been established in all the countries in Eastern Europe. of employees Office space (square meters) Warehouse space (square meters) No. of employees Office space (square meters) Warehouse space (square meters) No.3 Sales Statistic Country: Czech Republic 1991 Total sales (USS thousands) Active file count Activity %/month (average) Sales/active/month. There is a strong ambition and commitment by the new democratically elected governments in some of these countries to de-velop their markets along the lines of Westernstyle market economies. and Yugoslavia. of employees Office space (square meters) Warehouse space (square. In particular the Directors of ORESA believe that opportunities exist for companies: 1. (USS average) No. Af Jochnick. Of employees Office space (square meters) Warehouse space (square' meters) No. I believe that for the companies. a woman of Czech origin living in Malmo. af Jochnick was appointed Chairman of ORESA. with initial emphasis on Czechoslovakia. Sales were growing so fast that Eshibits . Which are willing to invest in the development and professional training of local nationals as future management. She accepted and first sales ‘were made in December 1990.7% 289 11 350 100 1 8. of employees Office space (square meters) Warehouse space (square meters) No. Which are prepared to re-invest cash and profits in the local markets and which are in a position to wait a considerable period before remitting profits. manufactur-ing for export of cosmetic products in Eastern Europe was envisaged. meters) No. Investment in these countries must instead be based on the belief that the recent political changes are irre-versible and that there will remain a strong commitment to develop these economies with policies based on Western economic principles.2 . Romania. Hungary.625. of Jochnick had-resigned from his position as Oriflame chairman in order to devote more time to look at new marketing opportunities.4% 98 74 750 1500 9 70. 3. The tech-niques seemed particularly well suited to these countries due to the highly undeveloped retail distribution networks found there at that time. of service centers Advertising spending (USS in thousands) 4526 2320 74% 490 9 300 600 Start: December 1990 1992 1993 1994 12684 7629 81% 138 33 300 660 16 15 12758 12494 68% 125 51 450 700 17 378 13700 18804 61% 112 61 600 1000 21 400 INTERNATIONAL MARKETING Country: Slovakia Start: January 1993 Total sales (USS in thousands) Active file count Activity %/month (average) Sales/active/month (USS average) No. particularly in Eastern Europe. The objective was to exploit business opportuni-ties for the direct selling of cosmetic products in Eastern Europe. of service centers Advertising spending (USS in thousands) 1993 554 819 89% 218 11 280 200 1 22 1994 1845 3048 66% 196 26 480 300 3 50 134 © Copy Right: Rai University 11. opened an office in Brussels for the new company.5 1993 9500 18933 53% 81 60 280 1200 4 275 1994 6400 9090 59% 90 30 550 600 60 89 1994 13500 23285 50% 93 75 400 1200 9 250 Start May 1991 Country: Hungary Total sales (USS in thousands) Active file count Activity %month (average) Sales/active/month (USS average) No.7 1993 9933 16224 61. A 100-square-meter office was opened and after 3 months. of service centers Advertising spending (USS in thousands) 1992 1278 2523 83. and Poland. $300. The initial objective of ORESA was to establish sales organizations in Czechoslovakia. 4. and legislation is being proposed or passed in a number of Eastern European countries to encourage foreign investment. the Soviet Union. Which are active in the consumer goods areas. 2.

Sales dropped 40 percent below forecast. Which had only a small in-crease. in spite of a lot of red tape and bureaucracy. Our ambition is to become market leaders. The company had great hopes for this more Western market where well-trained managers were available and where everything seemed to be a lot smoother and easier. a figure which is much higher then the other bordering countries. “Our initial aim was to start with Czechoslovakia and then to follow with Poland and Hungary and other markets according to our success in established markets. A re-launch of Oriflame’s activi-ties in Germany took place during the course of 1995. inadequate banking systems.200-square-meter office and a 2. implementing the same Marketing Plan as in other Eastern European countries. Oriflame opened a 400-square-meter office and a 600-square-meter warehouse in August 1994. Oriflame had 75 employees in Hungary. where competitors like Avon and Amway were already established.a 600-square-meter office in Prague with a 1.S. a member country of the European Union with no import duties. Edward Zieba.625. telecommunications. was due to start operating in mid-1995. In 1995 the head office was staffed by 30 people. $20. Oriflame Greece showed profit. Approximately 25 percent of the Hungarian population lies in the Budapest area. Ori-flame Germany is being managed from Brussels. which had never been used in his country.000 in the first 2 weeks and are still today among the leaders in the Polish network. and Latvia. The operations have been greatly helped by the country’s well-developed infrastructure (banking. 0 RESA has.2 © Copy Right: Rai University . the dollar value moved from 14. but also according to available management resources. Oriflame Turkey opened a new 1. Fredrik Ekman. moved to Moscow in October 1993 From 1991 to 1995. ORESA planned to open sales companies in Romania and Lithuania. the company is now ready to adopt direct sales there. and 15 service centers spread over the country. A Polish citizen who had spent 2 years in Iran and who was fluent in English was re-cruited as country manager. Success was immediate. he had long discussions at the Brussels headquarters of ORESA and visited the Oriflame production plant in Ireland and the emerging sales com-pany in Czechoslovakia. Dudng the first months of 1991. Mattsson says. However. This was noth-ing compared with what the company had experienced in Eastern Europe up to now. and a relatively un-developed infrastructure has made it difficult to use the traditional Oriflame concept of selling through distribu-tors. They ordered. Ukraine. Sven Mattsson was general man-ager of Oriflame until the company found a Swede with a Hungarian background. Oriflame sales were $450. Thomas Grunwald.” INTERNATIONAL MARKETING The company had to stop recruiting for a while to establish a warehouse and find new office facilities. Supply. Oriflame started operations in Turkey. Local management has also been very successful in work-ing with leaders of the network. “This can partly be explained by the fact that Oriflame naturally offers the best service level within the capital region. In 1994. Oriflame had . In December 1992. In Russia. sales did not develop as fast as in Poland and Czechoslovakia.000 Turkish liras over a few days. Oriflame started its sales in Greece. During that month. In March. ORESA increased its staff and office facilities in Brussels. Our mentality is too different and what we have lived 135 11. In Poland. In Bulgaria.000. In January 1995. “I really thought at that time that it could not possibly work in Poland. was recruited by Oriflame with the objective of starting operations in Warsaw. Business De-velopment and Legal Affairs (see Exhibit 4). A 10.” In 1994. In 1995. Zieba became very skeptical about the development of Ori-flame in Poland with direct-selling techniques and a multi-level approach. In Hungary. This involved a total investment of approximately 20 million U. Finance.).OOOsquare-meter warehouse near the Istanbul airport. In April 1992. etc. the company recruited the. However. A Swedish manager. Oriflame in Poland Decision to Start In December 1990. among themselves. Ori-flame’s high expectations were not met in 1994 because of the economic crisis Turkey faced during the year.000-square-meter warehouse. The initial investment was paid back after 3 months of operations. of service centers Advertising spending (USS in thousands) 1994 810 2450 93% 200 15 400 600 0 2 In May 1993. but Sven Mattsson remained optimistic about the medium and long-term future. which was when the first Oriflame products were sold.000 to 40.first 12 distrib-utors in March 1991. with distributors placing an average monthly order of $250 in this country where the average income is only about $80 per month. 3 years later. sales were developing faster in Hungary (plus 38 percent) than in the Czech Republic (plus 15 percent) or in Poland.Start: August 1994 Country: Bulgaria 1991 1992 1993 Total sales (USS in thousands) Active file count Activity %/month (average) Sales/active/month (USS average) No. At the beginning. ensuring centralized functions such as Operations and Marketing. located in Warsaw. of employees Office space (square meters) Warehouse space (square meters) No. who had worked for a state chemical company in Poland and who had spent 3 years in Iran with a construction company. Oriflame had to pay 12 percent duties for the Czech Republic and from 10 to 50 percent for Hungary and 20 per-cent for Turkey. and the company experienced its biggest initial growth. dollars.000-square-meter ultramodern manufacturing plant. to assume re-sponsibility for Hungary in May-1991. In 1994. Turkish distributors appeared’ to be entrepreneurial and cooperative. As Sven Mattsson likes to say. both in the direct selling industry as well as the cos-metic industry and to capitalize on all the advantages which result from being the first on a market. since 199(sold its products wholesale to retail outlets as high in-flation.

60 percent of which were filled and packed in Ursus.through over past decades left little hope of im-plementing such methods with success. Our intention was and still is to offer the most comprehensive range of skin care. product awareness. We see a catalogue as a major marketing tool and there is a lot of effort going into the preparation of every issue. Oriflame generally sells in local currency. At the end of the evening. Since conception. 1 had accepted the job because I treated it as something new and exciting. the others were on an agreement basis with different entrepreneurs. and some real products are all in the starter kit that any new distributor has to buy at the cost of $28 in order to start their business. The advertising budget for 1994 was almost $700:000. a selection of 100 items was offered. We are still investing considerable amounts of money into it and experimenting with its look and content. A first product selection was made by the Marketing Department in Brussels and one of Zieba’s first assign-ments was to propose local pricing. In 1994.1992. A new warehouse has been completed along with new pick and-pack facilities for a few thousand orders per day. Although the quality of the prod-ucts was fully recognized. and men’s fragrance. a daily newspaper published in Warsaw printed an article that said: “Swedish company Oriflame was the first direct selling company in our market (1991).000 copies of its catalog: showing 250 products classified in the following categories: skin care. most of them in rented villas throughout the country. The com-pany decided that the catalogs should always pass through the distributors and would never be sent directly by the company to a prospective consumer.12 service centers were opened. color and fragrance products in the Polish market. 10 of which were company owned.” commented Zieba to the case writer during his visit to Oriflame Warsaw in May 1994. Oriflame products link the best of nature with the best of science to achieve the highest quality. In 1994. eight of them were selling Oriflame products as their only professional activity and were at the epicenter of sev-eral different networks of thousands of distributors. product price positioning has been one of the most important issues and intensive market studies are continuously carried out in this area. family favorites. Oriflame was selling a range of 200 products. Three catalogs. I do not think that one can not over estimate its impact on the company image. the speed of turnover growth and network development in Poland is the most remarkable in the 27 years history of the company. They are produced from nonirritant.000 registered members. in 1994. of which 70 percent was spent on TV. later followed by the installation of pack-aging facilities in the old factory. At a later stage. Oriflame issues 380. On January 31. 136 © Copy Right: Rai University 11. to allow distribu-tors to come and pick up the merchandise. In March 1992. body care. therefore. Oriflame started its operation in Poland in March 1991. all of those gath-ered there started asking questions. Prices are not printed in the catalog but on a separate loose sheet. which have to be made 15 months in advance.000. the com-pany decided to invest into both advertising and public re-lations (PR) activities to strengthen its brand awareness. followed by spring and autumn of 1994. it became evident that Oriflame was aiming toward a mass market with its sales volume and. samples. “It is nec-essary to keep on top of a rapidly changing economic en-vironment. 1995. The first successful advertising campaign was run in the autumn of 1993. Oriflame cosmetics are gentle but effective.2 . INTERNATIONAL MARKETING Operations When Oriflame started operating in Warsaw from a rented villa. Three years later. a product guide.” Merchandise Support Twice a year. After a while. all of them of Polish origin.” Products and Pricing Initially. each of the guests appeared concerned about the selling method. a cooperative that produced cosmetic products in Vrsus. By April . In 1993. 70 percent of the products were out of stock. The first months clearly showed that consumer habits differ in many areas from what we are used to in western countries. One year later. information on the marketing plan. Translation and typesetting of the texts is made in each country before the printing. the number increased to 150. Oriflame Poland employed 150 people. and finally on sales. Below-the-line activities included not only traditional PR but also exhibitions and company promotional days in all major cities in the country. At that time. cosmetics. warehouses. Additional cat-alogs can be acquired at Advertising and Public Relations In 1993. According to Oriflame management. he gave a few samples to those interested (all of them) while briefly explaining the opportunity of the Ori-flame marketing plan. with the remaining 40 percent coming from the factory in Ireland. a suburb of Warsaw. with an estimated audience of 300. That time was used to reorganize all distribution procedures and open some service centers. The distribution network counted over 50. One of the difficulties the company has to face is a product sales forecast. It is one of the best investments. people were lining up for hours in the street to buy some of the first product range. and the company decided to stop recruiting new distributors for 3 months. free choice was given with regard to new introductions and discontinuations. Rapidly.625. natural plant extracts and protect the skin against the harmful effects of pollution and stress. B040na Karpinska had joined the company as operations manager in charge of distributors. Ori-flame had created a total of 18 centers. The media used were mainly public TV and all segments of women’s magazines. but I was very doubtful. women’s fragrance. Oriflame Poland purchased Kamelia. and customer service. color. using the same cata-log in nine different countries. At an early stage it was decided to offer very competitive prices in order to attract millions of new cus-tomers rather than selling a limited number of items’ with traditionally high margins. cost by the distributors. Zieba gathered some 20 of his friends with their spouses for a cozy party during which he-did not speak about Oriflame but only displayed some products on a table in the kitchen. By 1995. Ori-flame prints all its catalogs in Sweden.

020 53 118 154 1. Bliznes Start. The only products Amway buys from Polish companies are advertising gadgets: bags. In Poland. and silverware or 24-carat goldplated coffee set only after the last installment is paid. Its total annual sales amount in 1994 was $4 billion. Edward Zieba commented on the Ori-flame situation in Poland: We want to intensify our support because we do not only want to do business but also develop social life and the individual distributor. Exhibit – 5 Sales Statistics Country: Poland Total sales (in USS thousands) Active file count Activity % /month (average) Sales/active/month (USS average) No. something which gives you the opportunity to learn how to make safe contacts with other people-and buy some luxury in different forms.180 45. Amway has more than 2 million distrib-utors. In 1993. In the world. distributors’ cash pay-ment facilities are organized’ in all service centers across the country. of employees Office space (in square meters) Warehouse space (in square meters) No. Poland is their best market. which are expensive by Polish standards.M.000 distribu-tors. The demonstrations of its products take place in private homes. it now boasts the largest network of sales agents.566 24. of service centers Advertising spending (in USS thousands) 1991 2. had set an objective for herself: “I wanted to become a Sapphire Director and buy a new car an Alpha Romeo. Total sales for 1994 were estimated to be$28 million. were described as follows: Amway. Herbalife. Every Monday at 4:30 P. sales grow monthly.” said Jonas of Jochnick. It is also the author of a television serial. Oriflame. I learned responsibility. and not to break the rules.” Of the 573 distributors who have reached the director level and beyond. care cosmetics. Amway is not just cosmetics. Zepter. Although Amway came to our market relatively late. one of the world’s largest and most dynamic directsales companies. Zepter is a Swiss-Austrian firm. So far.782 84 355 14 130 100 0 0 1992 21. he has organized training sessions for the directors. pans. a student at Warsaw University.” Another distributor. Another several hundred are making a living that is far beyond average standards in Poland. Amway differs from its Swedish competi-tor in that.” Amway distributors are not employees of the company but are independent entrepreneurs who have their own businesses. Jerzy Ruggier. the company’s founder and president. dishwashing liquids. In May 1994. explains: “I know that I have to create a place for my job. Competition In 1994. both in terms of the number of distributors and in terms of sales. Two of them. he or she can generally place orders on credit up to DS$50O. Bert Wozciech. 90 percent of them devoted all their working time to Oriflame.000 active distributors (placing orders at least once during the preceding 3 months) plus 30. One becomes the owner of the chrome-nickel pots. The big ad-vantage of the Amway products is that they can be returned even after they are taken out of the packaging.400 18 700 INTERNATIONAL MARKETING In Sweden. the majority being 25 to 35 years old. it also presents people-Polish businessmen. An Amway executive stated: “Poland is our best market in both sales and number of distributors in relation to its population. We believe it is a prudent decision to broaden our activities here by building an ultramodern factory.390 38. Using the prod-ucts purchased by the owner of the house.625. The Oriflame Distributors When a new distributor registers with Oriflame. the av-erage order being $100. during a press conference at Oriflame headquarters. Zepter had 25. which for the past year has been selling kitchen utensils. Amway managed to build a network of 100.Frequent contacts with the press resulted in broad media coverage. Joanna Szablinska. who sell about 11. 400 of the company’s own products and a few thousand products manufactured by other firms from which Amway has acquired selling rights. joined Oriflame as training man-ager for the whole network. Oriflame is a way of socializing. In the opinion of the Amway bosses.000 2. One distribu-tor. and so on. it has no plans to start pro-duction.101 65 288 81 600 900 2 20 1993 35. a market which is still growing.2 Oriflame Manufacturing in Poland The high demand for natural skin care and makeup products in Poland inclined the Oriflame corporate management to make the investment at Ursus.000 active distributors. It is a way to start a small business and to help people to under-stand the new laws and taxes. we want to develop a club. the person making the presentation demonstrates the advantages of using the Zepter pots and pans. in Warsaw. at the moment. Zepter products can also be purchased by installments. Amway in Poland sells about 20 products: laundry detergents. Given the state of the bank system. Amway and Zepter. balloons and so forth. In 1992-1993.250 1. Amway. to be honest. which was still very poor in 1994. The $20 million manufacturing plant was due to start operating during 1995.000 non-active distributors (no orders in the last 3 months). to make the distributors more able to meet other people and belong to something special. multina-tional companies such as Avon. “We see Poland as a very big and important market for our products. Since 1993. The Oriflame network consists of some 75 percent of women and 25 percent of men. This program talks not only about the basics of entrepreneurship and a free market economy. Oriflame Poland had built a net-work of 50. It is important for me to sell high-quality products. with little negative comment. after 3 years as area manager for Benetton in Poland. a seminar on motivation. in a lawyers’ club. We do not want to give only more money to the distributors. the monthly turnover is about $30 million zloty. In December 1994.000 distributors in Poland but as the company’s repre-sentative assures is. and personal hygiene products.925 58 161 130 800 1100 14 320 1994 37. he conducted. It is a state-of-the-art production equipment and © Copy Right: Rai University 137 . The years of rapid growth are over but I am con-vinced that in 3 years from now we will have at least 100. which was free of charge and open to any active or prospective distributor who wished to attend. it was estimated that over a million Poles were working for different networks in direct-selling. has been active in Poland since 1992.

which will make it the most modern cosmetics factory in Poland. which is definitely partly due to successful advertising campaigns during the past years. How much value should be attributed to distributor convenience? Should inventory of the whole Oriflame product range be kept at each service center? Should the company invest in advertising campaigns? How important is the advertising for a direct selling company to keep the awareness high? Is it worthwhile continuing when the increased media prices are taken into considerations? Should the company enlarge its product range with noncosmetic products to increase sales and possibly to attract new distributors? A few countries into which Oriflame is considering expanding and where it is conducting marketing research still have high inflation rates. “The company is dedicated to ensuring that our customers receive the Strategic Issues After 14 years of activity in Eastern Europe. How far should the company go to increase its service to the distributors who. Turkey. highest-quality products at reasonable prices each time they purchase Oriflame cosmetics. demonstrate. This further improves the lead-time between order and delivery. results have been well beyond early expectations Sven Mattsson is now facing various issues that will influence the recommendations he will make to Jonas af Jochnick and the ORESA board for the future. Products are sold directly to the consumer by independent distributors who are not employed by Oriflame. The marketing plan called “The Success Plan. 20. speed and accuracy are very important and this is especially true for direct selling”. Local Management. a candidate should be sponsored by an existing registered Oriflame distributor. a more intangible product. First a concrete one originating from the product range of 200 products displayed in a catalog with a pricing policy that favored volume rather than margins. Support guidance. the direct-selling method. with minor adaptations where required. No distributor shall sell. Products will be made from the same ingredients and under the same strict quality control as in all other Oriflame plants. All production processes will be environmentally safe. and training were supplied from Brussels. “Our aim is to have our products priced below our international competitors and at the same time be considered as an alternative to cheap local products.” Distribution In order to facilitate the distributor’s activity.” According to Mattsson. Czech Republic. Oriflame cosmetics are made from pure. INTERNATIONAL MARKETING Key Factors In Oriflame’s Success Looking back over the years from 1990 onward and the development of Oriflame in Eastern European markets. There are no exclusive territories or franchises available under the Oriflame policy. and Hungary. In 1994. “Our distribution strategy has proven to be very successful. More than 300 people will be employed full time once the new plant is operational. What kind of specific pricing and product policy would the company need to implement in order to ensure a minimum risk for its investment? Should the company go for local management or expatriates? What kind of management is needed for starting up a new. Marketing Plan. Sven Mattsson identified these key factors to the com-pany’s success. 9. Any distributor is free to conduct his or her business in any area of the country. Second. A considerable amount was invested in “above the line” advertising to capitalize on the relative inexperience of media purchasing during 1991 to 1993. Poland had 18 service centers. The aim has been to give a 48-hour service turnaround throughout the country. 9: and Greece. which originated from the business opportunity offered to each distributor to develop their own business. natural ingredients. the remaining 35 percent come from subcontractors.2 . more distant sales company? What kind of management is required when the company enters into a more mature stage? Appendix: The Marketing Plan: An Overview To become an Oriflame distributor. 138 © Copy Right: Rai University 11. appreciate very much having products available as fast as possible? Moving the products faster always means higher costs. As Jonas of Jochnick explained. Poland is the second country where Oriflame cosmet-ics will be manufactured. printed advertisements. In each country. Since the beginning. As in all arrears of life today. and the Oriflame marketing plan. Hungary.” was the same for each country. the Czech Republic and Slovakia. “Oriflame considers itself as a company offering two kinds of products. This is especially true of former communist countries who have long forgotten the knowledge and practice of a free market economy.” PR and Advertising Investing in PR has always been considered important. Sending expatriates to do the job. and billboards. the company recruits a local manager and staff spending a lot of time during interviews explaining the nature and spirit of the free market economy. even if they had a solid knowledge and experience of both the company’s products and the local culture was never considered as an appropriate solution. Product and Price Out of the range of approximately 200 products. Oriflame developed a local management policy. the company manufactures about 65 percent.” says Mattsson oriflamme used a mix of TV commercials. of course. The marketing plan itself is considered one of the main assets of the company.000 per year in each country for PR and is planning to increase it in the coming years. or display Oriflame products in any retail outlet. Oriflame was spending approximately $45.625. the company has created in each country several service centers.complete research and laboratory facility. with staff spending a great amount of effort and time helping local markets. Part of the production will be ex-ported to neighboring countries. Mattsson summarizes the Oriflame concept. “Oriflame has reached 80 percent awareness in Poland. 3. with a 24-hour service in the capitals. in 1990.

Distributors can also earn a further 1 percent or 4 percent bonus if they meet certain criteria. In general. The monthly performance discount. the value of the BV equals the distributor price (DP). all outstanding payments must be made before a next order is placed.199 200-599 Monthly Performance Discount Percentage of BV 21% 18% 15% 12% 9% 6% 3% 11. The distributor’s income is based on a monthly accumulation of points. or by bank transfer.200-2. The total BP of all the products a distributor buys and sells during the course of a month will determine the distributor’s performance discount percentage.900 4.599 2.000 can be earned when reaching the higher titles in the marketing plan. Payments can’t be made at the Oriflame head office. the products are replaced or refunded through the 100% customer satisfaction guarantee.2 © Copy Right: Rai University 139 .Oriflamme recommends a markup of 30 percent on all products purchased at distributor price.999 1. The monthly performance of discount is added to the 30 percent markup. INTERNATIONAL MARKETING Monthly BP 10. but also on the business volume generated by any distributors who have been sponsored by him or her. Orders can be made at service centers or mail or fax by using a distributor order form. the maximum being 21 percent. equivalent to 10. excluding value-added tax (VAT). The available credit per order is $500. and business volume (BV). All products are assigned two sets of number: bonus points (BP).625. at some Oriflame service centers.400-3.000+ 6.600-9. If a customer is not satisfied. which is a monetary value that changes if prices change.000 BP per month. at the post office. which normally remains a constant number. or within 30 days from the date of invoice.000-6. Cash awards from $3000 to $20.399 600-1.

Brazil represents Volkswagen AG’s largest market outside of Germany. an FAW official told a state newspaper. by 1994. The deal had been a triumph for Mercedes. The venture is slated to produce Buick sedans for government officials. in 1997.6 million units in 1996 to 2. Internal rivalries bogged down that venture. Which countries should it enter and in what sequence? What criteria should be used to select entry markets: proximity. Additional international alter national 5. which had bested both Chrysler and GM for the contract in 1995. The Chinese government does not permit foreign companies to have majority stakes in joint ventures and reserves the right to set production levels and prices. directly through acquisition of a local established company. It is little wonder that most of the world’s leading automakers have set their sights on Brazil and China. “We shouldn’t be the appendage of the foreign automobile industry anymore. Chrysler’s joint venture with Beijing Auto Works has been producing Jeep Cherokees since the early 19805. VW of Brazil operates seven plants. In 1996. ( New investment plans are announced on a regular basis for example. I and Jurgen Hubbert. the partnership was dissolved. its rugged new Palio “world car” has been a hot seller since its introduction in 1996. the 200. a member of the Daimle Benz. a variety of obstacles and pitfalls await those hoping to develop I the market. geographic region. The total vehicle market is expected to increase If from. the Brazilian government suddenly boosted tariffs on car imports to 70 percent from. production delays allowed Fiat to reach the market first with its Polio. Meanwhile.1. These options are not mutually exclusive and may be used concurrently. including a lean-production truck plant in Resende. General Motors (GM) produces Blazers in Sao Jose dos Campos. however. it supplied the market with imports. Peugeot was forced to abandon a joint venture in Guangzhou.” The business landscape is littered with stalled projects. so the Chinese can also manage. for example.LESSON 14: ENTRY AND EXPANSION STRATEGIES: MARKETING AND SOURCING The objective of this lesson is to understand the following: 1. GM launched a joint venture with SAIC in 1997 valued at more than $1. Decision criteria for international Business 2. 20 percent. Toyota is a minor player. cultural and linguistic criteria. GM has earmarked $1. 140 3 million units by 2000. American producers are also in the market. Entry and expansion decision model 3. in 1987. Chrysler has a production facility in Campo Largo and also participates in a small-displacement engine manufacturing joint venture with BMW.000 Santana passenger cars produced each year by VW’s joint venture with . had some sobering advice for anyone considering: business in China: “Whenever you’re finalizing a project. What the South Koreans and Japanese could achieve. Exporting 4. or other factors? How should it enter new markets? Directly via “green fields” expansion. Fiat. as Ford prepared to build its own capacity. and analysts forecast sales of INTERNATIONAL MARKETING UNIT IV GLOBAL MARKETING STRATEGY Despite the general euphoria about China. that produces nearly half a million vehicles annually. GM.25 billion for three new plants including a $600 million state-of-the-art small car works in the southern Brazil city of Rio Grande do SuI. they boast the biggest populations in their respective regions as well as rapidly growing economies. the competitive situation. VW also produces its Jetta ( model in Changchun in partnership with First Auto Works _ (FAW). China holds huge opportunities for auto: makers. has spent $1 billion to increase production. and Honda’s $100 million plant produces only 15. Surprisingly. at various points in its history. For example. stage of development. The automobile industry provides a good example. The presence of VW.625. Both countries are big emerging markets.7 million by the turn of the century Volkswagen (VW) is currently the biggest player in the China market. you are really just starting. Big Emerging Auto Markets Like Brazil. Japan’s automakers have been relatively slow to develop the market. Two years later. Mercedes-Benz considered canceling its planned $1 billion joint venture with Nanfang South China Motor Corporation to build minivans and engines. faces a broad range of strategy alternatives. the venture was at a standstill.” The competitive environment in Brazil is also uniquely challenging. and other automakers in Brazil illustrates the fact that every firm. board. Even though the new Fiesta is a much needed hit with car buyers. The rhetoric from government officials can send chills down a car executive’s spine. Fiat. Recently. it faces a host of decisions. or indirectly using agents or representatives? Should the new market be supplied with imported product from the home or third countries or locally manufactured product? This chapter addresses these questions and examines various strategies that a company can utilize to “go international” starting with exporting and advancing to foreign direct investment. Nearly “2 million vehicles were sold in Brazil in 1996. Brazil’s number-two producer. Ford has invested more than $1 billion in a plant in Sao Bernardo do Campo that produces Fiesta subcompacts and the new Kaminicar. In far too many 11. however. Marketing strategy alternatives When a company decides to go international.5 billion. Ford had no choice but to supply Brazilian dealers with a mixed bag of vehicles from a variety of “ sources-a move that alienated the dealers and tarnished Ford’s reputation.000 Civics each year. Ford and VW established a joint venture called Autolatina.2 © Copy Right: Rai University . Shanghai Automotive Industry Corporation (SAIC) represent half of the market. In which countries can a company obtain parts necessary for production? In which countries and through which channels should the automobiles be sold? Should production be relocated or expanded to another country? Manufacturers can achieve competitive advantage by shifting production among different sites. for example.

VW Chairman Ferdinand Piech is trying to improve his company’s competitiveness by convincing unions to allow flexible work schedules. the critical factor is management. investing. U. employ only one strategy—often to their grave disadvantage. or Asia. employees would work six-day weeks. McDonald’s in war-torn Belgrade. the differences in factor costs will offset each other so that. In Germany. materials. manufacturing compensation costs are higher in Western European countries despite a recent decline. Companies must also address issues of marketing and value chain management before deciding to enter or expand their share of global markets by means of licensing. Political Risk Political risk. is quite limited as compared to a less developed preindustrial country in Africa. Often. It manufactures in Switzerland. companies have a “level field” in the competitive arena.625. The higher the level of income per capita. By producing cars in the United States they have a source of supply 11.2 © Copy Right: Rai University . or any other reason. Some companies are making the decision to go global for the first time. the basement was turned into an air-raid shelter. prices were lowered. McDonald’s corporate headquarters had little to say about these tactics but local management is quite happy and proud of their achievement. At this level. In general. therefore. If a country or a region limits market access because of local content laws. when demand slows.S.S. professional. Note that. other companies seek to expand their share of world markets. balance-of-payments problems. As Hayek puts it. Needless to say. plants. The second tier consists of the industrializing countries-for example. Companies in either situation face the same basic sourcing issues introduced in the previous chapter. exporting. The Japanese automobile companies invested in U. plant capacity because of concerns about market access. and capital The cost of these factors depends on their availability and relative abundance. joint ventures or minority ownership.cases.50 per hour in the typical developed country (LDC) to $6 to $20 or more per hour in the typical developed country. wages rates are no longer a significant factor in competitiveness.1 Market Access A key factor in locating production facilities is market access. is a deterrent to expanding internationally. and majority or 100 percent ownership. The same companies also fail to consider the strategy alternatives open to their competitors and thereby set themselves up to be victims’ of the dreaded “Titanic” syndrome-the thud in the night that comes without warning and sinks the ship. A Serbian cap was added to the Golden Arch logo. labor. For example. The political risk of the Triad countries. factories would produce cars only three days per week. For Volkswagen (VW). the more difficult it is to predict political risk. Basic manufacturing direct labor costs today range from $0. disadvantages. the highest-income country in the world. that is not exposed to the threat of tariff or non tariff barriers. Moreover. many times. and capital costs. and free hamburgers were distributed to anti NATO demonstrators. and Asia’s emerging countries have increased relative to the United States since 1980. Latin America. When this is the case. and management. SMH’s Hayek decided that he wanted to manufacture in Switzerland in spite of the fact that a secretary in Switzerland makes more money than a chief engineer in Thailand: He did this by making a commitment to drive wage costs down to less than 10 percent of total costs. the United States has abundant land and Germany has abundant capital These advantages partially offset each other. companies fail to appreciate the range of alternatives open to them and. For example. Labor includes the cost of workers at every level: manufacturing and production.if wages were the sole criteria for making a decision. Yugoslavia. there is an inverse-relationship between political risk and the stage of development of a country. it may be necessary to establish a production facility within the country itself. on balance. Singapore 141 INTERNATIONAL MARKETING Decision Criteria for International Business Before doing any business internationally through sourcing. For example. and worker team effectiveness. and costs will be and whether it is worth the risk. which were the basis of physical attacks. he does not care if his competitor’s workers work for free! He will still win in a competitive marketplace because his value is so much greater? The other factors of production are land. or a combination of these strategies. for example. The lower the level of political risk. the lower the level of political risk. World factor costs that affect manufacturing an be divided into three tiers. wages are only one of the costs of production and. had to change its marketing strategy to survive and minimize its American origins. such as management’s aspirations. or the risk of a change in government policy that would adversely impact a company’s ability to operate effectively and profitably. German hourly compensation costs for production workers in manufacturing are 155 percent of those in the United States. Many other considerations enter into the sourcing decision. The first tier consists of the industrialized countries where factor costs’ are tending to equalize. the wage differential between Mexico and Germany would dictate a Mexican manufacturing facility that builds Golf and Jetta models destined for the United States. during peak demand. 1ne difficulty of assessing political risk is inversely’ proportional to a country’s stage of economic development: All other things being equal the less developed a country. SMH assembles all of the watches it sells. a small percentage of the total cost associated with the product. compared to the United States. the more likely it is that a company will invest in a country or market. companies created production capacity abroad to ensure continued access to markets that had been established with supply exported from U.S. professional and technical. These decisions are affected by issues of investment and control as well as a company’s attitude toward risk. In the 1950sand 1960s. Do lower wage rates demand that a company relocate its manufacturing to the low-wage country? Hardly. whereas those in Mexico are only 10 percent of those in the United States. and it builds most of the components for the watches it assembles. the company must look at conditions in the potential country to analyze what the advantages. Factor Costs and Conditions Factor costs are land.

and truck carriers. A country may have cheap labor. Many companies have been chagrined to discover that today’s cheap factor costs can disappear as the law of supply and demand drives up wages and land prices. the greater the time delay for delivery and the higher the transportation cost. The dramatic shifts in price levels of commodities and currencies are a major characteristic of the world economy today.to two-month time lag for shipping goods by sea and costly inventory expense and provides consumers with the latest product. the Arrow experience illustrates how the decision to source at home rather than abroad does not automatically defuse the political issue of exporting jobs: After automating. As a result. The nonperishable components such as housings. if the dollar. such as drives. practices what it calls the “fast-food business model.4 n n e h 9 3 a i b a a i n t a i e g e me t Shipping Considerations In general. innovation and new transportation technologies are cutting both time and dollar costs. As wages and real estate costs increased. Indonesia. During the 1970s and 1980s. and Singapore. exports! and imports represent approximately 5 percent of total costs. air. keyboards.2 . In Europe. and Puerto Rico. and El Salvador. Thailand. The prudent company will incorporate exchange volatility into its planning assumptions and be prepared to prosper under a variety of exchange rate relationships. are manufactured as needed and air shipped to the RBUs where the final product is assembled. but does it have the necessary supporting services or infrastructure to support a manufacturing activity? Many developing countries offer these conditions. The third tier includes Russia and other countries that have not yet become significant locations for manufacturing activity. Acer.S. Exchange rates are so volatile today that many companies pursue global sourcing strategies as a way of limiting exchange-related risk. production was shifted to Hong Kong and then to Taiwan and Korea. shirt production has shifted from the Far East to Costa Rica. During the 1980s. Country Infrastructure In order to present an attractive setting for a manufacturing operation. the financial crisis in Russia in 1998 saw the ruble drop from 6 to the U. Arrow decided to phase out imports after spending $15 million to automate its U. One of the challenges of doing business in the Russian or Chinese market is an infrastructure that is woefully inadequate to handle the increased volume of shipments. service and component suppliers. The application of advanced computer controls and other new manufacturing technologies has reduced the proportion of labor relative to capital for many businesses. what has been an attractive location for production may become much less attractive due to exchange rate fluctuation.S. Third-tier countries present the combination of lower factor costs (especially wages) offset by limited infrastructure development and greater political uncertainty. Such volatility argues for a sourcing strategy that provides alternative country options for supplying markets. civil order. yet there are also many other countries that do not. Manufacturers can take advantage of inter modal services that allow containers to be transferred between rail.S. At any point in time. which are constantly being upgraded. such as Lebanon. In addi60n to low wages. the yen. Bangladesh. but minimally it will include power. the final product is assembled just before the purchase. Thus. plants. Productivity increased 25 percent and Arrow is no longer at the mercy of a 12-month lead time between ordering and delivery. Acer divides computer components into two types. and floppy disks are manufactured in Taiwan and shipped by sea to their 39 regional business units (RBUs). which greatly speeds up delivery times and lowers costs. perishable and nonperishable. company managers and executives should also recognize the declining importance of direct manufacturing labor as a percentage of total product cost. it is important that the country’s infrastructure be sufficiently developed to support a manufacturing operation. a labor pool.” Like a Big Mac at McDonald’s. workers and closed four factories. or the mark becomes seriously over valued. Arrow sourced 15 percent of its dress shirts from the Far East at a cost savings of $15 per dozen compared to U. The experience of the Arrow Shirt Company also illustrates several issues relating to factor costs.S. For example.625.dollar to 25 rubles to the dollar. Arrow laid off 400 U. the cost of production supplied by “a country source will be determined in part by the prevailing foreign exchange rate for the country’s currency. Uganda.S. these countries offer tax incentives controls. transportation and roads.S. Guatemala. To facilitate global delivery. boat. However.-manufactured shirts. In formulating a sourcing strategy. U. In recent years. and effective governance. production kept shifting to China. Using this logistics strategy eliminates the minimum one. Perishables. Malaysia. making them extremely attractive manufacturing locations.-sourced shirts can be ordered a mere three months in advance-a critical issue in the fashion industry. a country must offer reliable access to foreign exchange for the purchase of necessary material and components from abroad as well as a physically secure setting where work can be done and product can be shipped to customers. The most advanced global companies are no longer blindly chasing cheap labor manufacturing locations because direct labor may be a very small percentage of total. the advent of the single market means fewer border 142 © Copy Right: Rai University 11. communications. Shirt makers like Arrow began sourcing in Japan in the 1950s.and other Pacific Rim countries-that offer significant factor costs savings as well as an increasingly developed infrastructure and political stability. Interestingly. transportation expenses for U. the Dominican Republic. it may not be worthwhile to incur the costs and risks of establishing a manufacturing activity in a distant location. Foreign Exchange In deciding where to locate a manufacturing activity. a Taiwanese company and the seventh largest producer of computers. The required infrastructure will vary from company to company. the greater the distance between the product source and the target market. transportation companies such as CSX Corporation are forming alliances and becoming an important part of industry value systems. a company with INTERNATIONAL MARKETING u d rt e1 8 C r b e n B s nI i i t v a r e . Today. Honduras. In addition.

and (6) product fit. it must offer more value than its competitors-better benefits. 5. Shipping Costs and Time INTERNATIONAL MARKETING Preparation and shipping costs can affect the market potential for a product. which may or may not be relevant to the individual export markets being considered. alternative transportation strategies should be considered. Creating a Product-market Profile The first step in choosing export markets is to establish the key factors influencing sales and profitability of the product in question. a group of products. The basic questions to be answered can be summarized as the nine Ws: 1. shipping costs may render the imported product uncompetitive. secondary information is a good place to start. Potential Competition Using a country’s commercial representatives abroad can also be valuable. can it be delivered at a cost that is consistent with the size of the market? 6. its product-market profile will most likely be based on its experience in the home market. import restrictions or quotas. engage in direct selling). the federal government has numerous publications available.production capacity in other locations can achieve competitive advantage by shifting production among different sites. (5) service requirements. (4) potential competition.. Market Potential detailed. then the commercial representative could provide a very useful report based on a comparison of the company’s product with market needs and offerings. Service Requirements If service is required for the product. What need or function does our product serve? 4. In general. For example. by attending a trade show. and (3) estimated cost insurance freight (C. Who does not buy our product? 3. develop or expand markets. (2) market access. or both. Market Selection Criteria Once a company has created a product-market profile. Market Access This aspect of market selection concerns the entire set of national controls that applies to imported merchandise and any restrictions that the home-country government might have. Visits to The Potential Market After the research effort has zeroed in on potential markets. (2) descriptive brochures indicating features and advantages.2 © Copy Right: Rai University 143 . and locate potential end users (i. Six criteria should be assessed: (1) market potential. If. When contacting country representatives abroad. What is the basic market potential for the product? To answer this question. It includes such items as export license. and the depth of their market penetration. a product fits a market if it satisfies the criteria discussed previously and is profitable. This applies to export marketing as well as marketing in the home country. and preference arrangements. First. What are customers currently buying to satisfy the need and/ or solve the problem for which our product is targeted? 6. of trade fairs-usually organized around a product. company representatives can conduct market assessment. If a manufacturer simply says. What problem does our product solve? 5. if a similar product is already being manufactured in the target market. The cost of assembling sales literature. U. there is no substitute for a personal visit to size up the market firsthand and begin the development of an actual export marketing plan. A market visit should do several things. lower prices. Is there a market for them in your territory?. Where is our product purchased? 9. It is important to investigate alternative modes of shipping as well as ways to differentiate a product to offset the price disadvantage. “Global Marketing Information Systems and Research. trade centers alone hold 60 product shows annually in major cities abroad. compiled by the Central Intelligence Agency (CIA) and various other agencies and organizations. foreign exchange regulations. it is possible to learn a great’ deal about competitors’ technology. or activity-are held in major markets. and local competition. “I make lawn mowers. while walking around the exhibit hall. on the other hand. Valuable sources were discussed in Chapter 6. the final step is to decide how well a company’s product fits the market in question. and technical bulletins should also be considered in comparison to market potential and profitability. 1. This cost is particularly important in selling highly technical products. catalogs. Remember. If it takes months for the product to reach the target market and the product competes in a rapidly changing category such as computers. 2. Because this information is quite 11.E) and retail price in the target market.e.” In the United States. show. Perhaps most important. import duties. One way to visit a potential market if through a trade. (3) shipping costs. if a company wants to penetrate an existing market. If a company is getting started for the first time in exporting.625. the next step in choosing an export market is to appraise each possible market. it should confirm (or contradict) assumptions regarding market potential. find distributors or agents. A second major purpose is to gather additional data necessary to reach the final go/no-go decision. When is our product purchased? 8. the manufacturer provides the following information: (1) sizes of lawn mowers-manufactured. it is best to directly consult the trade bureaus of countries that are being considered. By attending trade shows and missions. Each answer provides an input into decisions concerning the four Ps.I. Product Fit With information on market potential. it is important to provide as much specific information as possible. “ Who buys our product? 2. 4. pricing. the general rule in marketing is that. What price are they paying for the products they are currently buying? 1. Why is our product purchased? Any company must answer these critical questions if it is going to be successful in export markets. 3. Hundreds. For example.S. cost of access to the market.” the representative cannot provide much helpful information.

New automated production equipment was installed-at a cost of $20 million-that allows changeover to different products in a matter of seconds. this issue is resolved by a national policy that requires local production. For example. the chief executive of G. began assembling home coffeemakers in Portugal in 1995. Professional managers are being hired to assets owners some companies may even move production out of Germany. Meanwhile. Sourcing: Home. A contract manufacturer may be in a position to add production to an existing plant with less investment than the manufacturer would require to achieve the same volume of production. N. there is some minimum volume required to justify the investment required to establish a production site. or the promotional material to suit the requirements of global markets. Assuming that the choice is up to the company. International Market Entry and Expansion Decision Model 1. for unique products with little or no international competition. a. but venture capital can be hard to find. In high-income countries. Eberspacher. Germany’s banks have tightened loan terms. trade associations. Any company wishing to enter the market of such a country must source locally. German unions have won wage hikes for workers. Italy. the trade-offs for local versus regional or global production are cost. Barth. 2. it has a choice of buying. but a lack of organization has limited their political influence in Bonn. W. and banks assist exporters with documentation and other issues. Many companies are going public to raise capital. Similarly. For companies in which money is tight. delivery. must decide who to appoint to key positions 3. a major investment in technology allows the company to tailor products to customer needs by means of flexible manufacturing. This selling approach may work for some products or services. and the mark’s continued strength puts additional upward pressure on export prices. third. and other companies have snapped up Barth’s roasters. capital. building. exports account for as much as 40 percent of sales. exporting is a way of life for the Mittlestand. companies new to exporting may initially experience success with selling. and investing 144 Exporting is just one strategy for a company that has decided to go international. earnings. Eberle.625.2 © Copy Right: Rai University . training. local production is normally not required. the contract manufacturer is in a position to quote an attractive price. For companies such as steel maker J. Export selling does not involve tailoring the product. heavily in research and development. land. Mattah Hohner has 85 percent of the world mouth organ and accordion market. Germany’s Mittelstand Part of the Mittelstand’s success can also be attributed to Germany’s export infrastructure. it becomes necessary to engage in export marketing. a machine tool manufacturer. country of origin factors 2. Meanwhile. If choice is to establish own organization. bankers. It also demonstrates the-difference between export selling and export marketing. which makes auto exhaust systems. Mittelstand owner-managers target global niche markets and prosper by focusing on quality. licensing production is an economical alternative. transportation costs are greater and provide an incentive to locate production closer to the Customer. Strategy implementation If a company decides to source locally. and innovation. franchising. The company’s global market share stands at 70 percent-a threefold increase in a 10-year period-as Ghirardelli Chocolate. Even today. company managers or sales personnel should be able to get a good general impression of competitors in the marketplace while at the same time trying to sell their own company’s product. materials. In response to the 1992-1993 recession in Europe. Trumpf. Hershey Foods. as companies mature in the global marketplace or as new competitors enter the picture. or host country? Cost. joint 11. information about promising deals is conveyed back to Germany. in industry after industry. several countries-notably Great Britain. marketing mix strategy 5. quality.The current business environment both outside and inside Germany is presenting difficult challenges to the Mittelstand. such an approach is possible. the managerial mind-set in many companies still favors export selling. This move brought down prices on exports from those countries and made Germany’s exports correspondingly less price W competitive. and Sweden-devalued their currencies. Costs include labor. and other officials around the world are constantly on the lookout for opportunities. Marketing mix strategy: Goals and objectives in sales. Diplomats. The success of the Mittelstand serves as a reminder of the impact exporting can have on a country’s economy. Melitta.$4O million manufacturer of motors and other components for cranes. INTERNATIONAL MARKETING Exporting In Germany. Some banks have special Mittelstand departments to provide export financing and assist companies in obtaining insurance. In country or in-region marketing organization? Cost. Other options are licensing. invested nearly $2 million in infrared technology that reduced temperature variances. for example. At ABM Baumtiller. the country where the product is sold. If the product is heavy. market access. a company that manufactures cocoabean roasting machines. Entry and Expansion Decision Model The first issue that an expanding firm must address is whether to export or produce locally. Over all. In many emerging markets. or renting its own manufacturing plant or signing a local contract manufacturer. The story is repeated throughout Germany. Scale economies are an important factor in determining cost: For every product. Selection. and share of market positioning. However. so the choice is up to the company. the price. For example. as a result. and transportation. resulting in a credit crunch. and customer value.one can gather literature about products that often contains strategically useful technological information. Mittelstand owners are taking steps to ensure their own survival. and motivation of local distributors and agents 4. The only marketing mix element that differs is the place-that is.5 million small and mid sized companies that generate two thirds of Germany’s gross national product (GNP) and account for 30 percent of exports. If this is the case. market impact assessment. For other companies the share is even higher. Offsetting transportation costs are scale economies that result from spreading fixed costs over a greater production volume. representatives from. export trading companies. the Mittelstand are world-class exporters. and J.

the export marketer also adjusts strategies and plans for communications and distribution to fit the market. Mittelstand companies such as ABM Baumiiller exemplify this approach.g. The firm exports to one or more markets on a trial basis. A successful global company can source its product from any location: The customers trust the brand and don’t care about the country of origin. all countries where English is spoken. photographs. Similarly. “We have to approach the international market with marketing literature as opposed to sales literature. other advantages include increased flexibility and resiliency and improved ability to deal with sales fluctuations in the home market. 1. distribution and channels. The study also showed that. 11. The firm is an experienced exporter to one or more markets. If customers are nation elastic. it is less clear that export intensity-the ratio of export sales to total sales-is positively correlated with firm size. 6.ventures. To the export marketer. The firm is unwilling to export. Such a firm would be an export seller. The firm evaluates global market potential before screening for the best target markets to include in its marketing strategy and plan. To reach this stage requires management with vision and commitment. After this success. Moving from stage 2 to stage 3 depends on management’s attitude toward the attractiveness of exporting and its confidence in the firm’s ability to compete internationally. A company that reaches stage 7 is a mature geocentric enterprise that is relating global resources to global Opportunity. It is modified as needed to meet the preferences of international target markets. advertising. Export marketing requires. and regulations. although profitability is an important expected benefit of exporting. In global marketing. 100% INTERNATIONAL MARKETING Exporting Decision Criteria Export marketing targets the customer in the context of the total market environment. Table summarizes some of the export-related problems that a company typically faces. the product offered in the home market is a starting point.” Export marketing is the integrated marketing of goods and services that are destined for customers in international markets. Whereas research generally supports the proposition that the probability of being an exporter increases with firm size.2 Ownership & Strategic Alliances Ownership Equity Joint Venture Licensing 0 0 Franchising Management Contract 100% Control The probability that a firm will advance from one stage to the next depends on different factors. they may put a positive value on the feature “made in the home country. other environmental factors may come into play and the marketer might want to explore joint ventures or foreign direct investment opportunities to maximize international opportunities. Charges incurred in export preparation. The export marketer does not take the domestic product “as is” and simply sell it to international customers. An understanding of the target market environment 2. the firm pursues country. Such preferences must be identified using market research and factored in to solve for value in the equation. not the country or origin.. Finally. the issue of customer value is inextricably tied to the sourcing decision. Global companies succeed by convincing customers in world markets that it is their brand that signifies value and quality. in and of itself. As the vice president of sales and marketing of one manufacturer noted. 2. 7. Before a firm can reach stage 4. An interesting finding was that even the most experienced exporters express a lack of confidence in their knowledge about shipping arrangements. One recent study noted that export procedural expertise and sufficient corporate resources are required for successful exporting. At this point. 145 © Copy Right: Rai University . This may be due to perceived lack of time (“too busy to fill the order”) or to apathy or ignorance. transportation. or artwork. The firm explores the feasibility of exporting (this stage may bypass stage 2). it will not even fill an unsolicited export order. effective communication about product features or uses to buyers in export markets may require creating brochures with different copy.625. 1. pricing. The use of marketing research and the identification of market potential 3. All markets-domestic and international-are regarded as equally worthy of consideration. 4. all countries where it is not necessary to transport by water). 3. Decisions concerning product design. and communications-the marketing mix Research has shown that exporting. is essentially a developmental process that can be divided into the following distinct stages. and foreign direct investment when it is an option for foreign companies (see Figure 8-1). The firm fills unsolicited export orders but does not pursue unsolicited orders. commitment is the most important aspect of a company’s international orientation. payment procedures. the export marketer sets prices to fit the marketing strategy and does not merely extend home-coup-try pricing to the target market. Success in stage 4 can lead a firm to stages 5 and 6. However.or regionfocused marketing based on certain criteria (e. 5. and financing must be taken into account in determining prices. In other words. The quality and dynamism of management are important factors that can lead to such orders. it must receive and respond to unsolicited export orders.

Logistics 1. distribution. using the tools and techniques described in Chapter 7 on targeting and segmentation. combined with data on gasoline consumption. when estimating the demand (or automobile-tires.2 . Obtaining financial information 5. export management companies. each of the foregoing possibilities exists within each division A company that assigns a sufficiently high priority to its export business will establish an in-house organization. The key issue underlying the second condition is the extent to which the target export market is different from the domestic market. financing and shipping arrangements. Providing technical advice 15. Trade restrictions 21. According to one recent survey of U. The advantage of this arrangement is obvious: It is a ‘low-cost arrangement requiring no additional personnel. When this figure is combined with tire life predictions. The next step is the choice of one or more export markets to target. Providing parts availability 13. including potential market size. A market of 100 million customers should not be ignored. It then faces the question of how to organize effectively. with a population of 1 billion people. 10 percent of the population or 100 million people are considered middle class and can afford most consumer goods. Licensing 11. it is a straightforward matter to calculate demand estimates. However this approach can work only under two conditions. Customer/duty Servicing Exports 12. If customer circumstances and characteristics are similar. Additional statistical measures will considerably sharpen the estimate of total demand for example.is often a good starting indicator on which to base demand estimates. Sales effort 18. there are numerous export services providers from which to choose. export brokers. Providing repair service 14. however. Market data are also available from export census documents compiled by the Department of Commerce on the basis of Shipper’s Export Declarations (known as “exdecs” or SEDs. the most important INTERNATIONAL MARKETING The decision to engage in export marketing should be based on a number of criteria. and ‘export distributors. and documentation. Arranging transportation 2. A typical EMC acts as the export department for several unrelated companies that lack export experience.500 or more). EMCs perform a variety of services. and promotion. Distribution coordination 6. should permit estimation of the total mileage driven in the target market. Through an export department that is independent of the domestic marketing structure 4. Second. Through an export department within an international division 5. Organising for Exporting Manufacturers interested in export marketing have two broad considerations: organizing in the home country and organizing 146 © Copy Right: Rai University 11. that competence must be applicable to the target international market(s). responsibilities may be incorporated into an employee’s domestic job description. Depending on the company’s size. These include export trading companies (ETCs). External independent Export Organizations If a company chooses not to perform its own marketing and promotion in-house. Competition overseas in the target market country. Through an export partner affiliated with the domestic marketing structure that takes possession of the goods before they leave the country 3. Product liability 10. and overall marketing mix issues such as price. manufacturers’ export representatives or commission agents. Handling documentation 4. these must be filled out for any export valued at $1.-based EMCs. the requirements for specialized regional knowledge are reduced. and available data. it is possible to arrive at a rough estimate of total potential demand for the product in one or more particular international markets: National income. competitor activities. The issues and approaches that relate to organizing are discussed next Organizing in the Manufacturer’s Country Home-country issues involve deciding whether to assign export responsibility inside the company or work with an external organization specializing in a product or geographic area. combination export managers. Obtaining insurance Legal Procedure 8. The selection process should begin with a product market profile or plan. In-House Export Organization Most companies handle export operations within their own organization. These data. the ultimate goal is to determine the major factors affecting demand for a product Then.625. Alternatively. It may be Possible for a company to make export responsibility part of a domestic employee’s job description. including marketing research. Locating markets 20. Advertising 17. For multidivisional companies. (EMCs). Whatever source of information is used. Marketing information Foreign Market Intelligence 19. Another important source of market data is the Foreign Commercial Service Web sites for the individual countries also provide much valuable information and contacts. Government red tape 9. A caveat. India. Providing warehousing Sales Promotion 16. data on the total number of cars registered in any country in the world should be easy to obtain. the domestic employee assigned to the task must be thoroughly competent in terms of product/customer knowledge. channel selection. these responsibilities may be handled as part of a separate division or organizational structure. export merchants. Transport rate determination 3. however. As a part-time activity performed by domestic employees 2. The possible arrangements for handling exports include the following: 1. is income distribution within the country. Packaging 7.S. shows a per capita GNP of $424. This depends on two things: the company’s appraisal of the opportunities in export marketing and its strategy for allocating resources to markets on a global basis. First.

there is simply not enough incentive for independents to invest significant time and money in representing a product. The distributing agencies sell products to franchised dealers. Direct representation allows decisions concerning program development. For example.activities for export success are gathering marketing information. The other great advantage to direct representation is that the possibilities for feedback and information from the market are much greater. They must appeal to the same customer. analyzing political risk. resource allocation. The cookies can be :purchased from ‘a catalog after travelers have returned home. INTERNATIONAL MARKETING © Copy Right: Rai University 147 . and obtaining financial information were deemed most difficult to accomplish. communicating with markets. whose owners observed Japanese tourists stocking up on cookies before returning home from Hawaii. special efforts are necessary to achieve sales. In many cases. Direct representation does not mean that the exporter is selling directly to the consumer or customer. The same survey ranked export activities in terms of degree of difficulty. market in the form of their distributing agencies. A case in point is the Kauai Kookiel Kori1pany. Finding good distributors can be the key to export success. Indirect or independent representation generally handles numerous other products for different Companies.S. In most cases. communications. Now the cookies are sold in a piggyback arrangement with) travel agencies in Japan. ‘and distribution. government should do a better job of helping EMCs and their clients analyze the political risk associated with foreign’ markets. a company must also make arrangements to distribute the product in the target market country. The advantage of direct representation is that these special efforts are ensured by the marketer’s investment. setting prices. setting pricing. direct representation involves selling to wholesalers or retailers. and ensuring parts availability. which are owned and controlled by the manufacturing organization. therefore. The basic decision that every exporting organization faces is: To what extent do we rely on direct market representation as opposed to representation by independent intermediaries? Direct Representation There are.S. use of an independent distributor is an effective method of sales distribution. Both parties can benefit: The active distribution partner makes fuller use of 11. thus reducing the amount of baggage. 8 Organizing in the Market Country In addition to deciding whether to rely on in-house or external export specialists in the home country. the piggyback arrangement can be a very effective way of fully utilizing an interlamination channel system to the advantage of both parties. two major advantages to direct representation by a company’s own employees in a market: control and communications. Piggyback Marketing Piggyback marketing is an innovation in international distribution that has received much attention in recent years. The manufacturer using the piggyback arrangement does so at a cost that is much lower I than that required for any direct arrangement. Even in larger markets. a small manufacturer usually lacks adequate sales volume to justify the cost of direct representation.625. when a product is not yet established in a market. and they must not be competitive with each other.2 its distribution system capacity and thereby increases the revenues generated by the system. Successful piggyback marketing requires that the combined product lines be complementary. This is an arrangement whereby one manufacturer obtains distribution of products through another’s distribution channels. if these requirements are met. This information can vastly improve export marketing decisions concerning Product. price. One of the study’s conclusions was that the U. sales force management. Moreover. and price changes to be implemented unilaterally. the major automobile exporters in Germany and Japan rely on direct representation in the U. it is usually not feasible to establish direct representation because the low sales volume does not justify the cost. Independent Representation In smaller markets.

pertains to specific actions and to the allocation of resources used to implement strategic planning goals in specific markets. casual market entry is successful. while another may offer the reverse. An international marketer who has gone through the planning process has a framework for analyzing marketing problems and opportunities and a basis for coordinating information from different country markets.and short-term goals of the company. but more often than not. and as the cost of entering foreign markets increases. The plan must blend the changing parameters of external country environments with corporate objectives and capabilities to develop a sound. so it is both a process and a philosophy.625. thus setting the stage for the failure of a venture that might have succeeded with full commitment and support by the parent company. planning is essential to success. as companies find new opportunities. strategic. The lack of well-defined objectives has found companies rushing into promising foreign markets only to find activities that conflict with or detract from the companies’ primary objectives. and long. Structurally. International corporate planning is essentially long-term. objectives. After company objectives have been identified. and with what level of resource commitment. Another key to successful planning is evaluating company objectives. permitting consistent policies. Planning allows for rapid growth of the international function. or market planning. Further. Company Objectives and Resources Evaluation of a company’s objectives and resources is crucial in all stages of planning for international operations. and goals to attain a desired end. Such commitment affects the specific international strategies and decisions of the firm.. channels. using inefficient marketing methods. it is a commitment of resources to a country market to achieve specific goals. International Commitment The planning approach taken by an international firm affects the degree of internationalization to which management is philosophically committed. or abandon them. Defining objectives clarifies the orientation of the domestic and international divisions. Tactical plans are made at the local level and address marketing and advertising questions. Is there a difference between planning for a domestic company and for an international company? The principles of planning are not in themselves different.2 . its organizational structure. The Planning Process Whether a company is marketing in several countries or is entering a foreign market for the first time. planning is the job of making things happen that may not otherwise occur.UNIT 3 LESSON 15: PLANNING PROCESS & ENTRY STRATEGIES Planning for Global Markets Planning is a systematized way of relating to the future. The process of planning may be as important as the plan itself because it forces decision makers to examine all factors that affect the success of a marketing program and involves those who will be responsible for its implementation. host country. Strategic planning is conducted at the highest levels of management and deals with products. incorporating generalized goals for the enterprise as a whole. planning may be viewed as corporate. and determination to stay in the market long enough to realize a return on these investments. The first-time foreign marketer must decide what products to develop. changing markets. Only when corporate objectives are clear can such differences be reconciled effectively. Foreign market opportunities do not always parallel corporate objectives. alter the scale of international plans. deciding on new markets to develop INTERNATIONAL MARKETING 148 © Copy Right: Rai University 11. and corporate environments). Each new market can require a complete evaluation. the key decisions involve allocating effort and resources among countries and product(s). Occasionally. in which markets. Any long-term marketing plan should be fully supported by senior management and have realistic time goals set for sales growth. capital. management needs to determine whether it is prepared to make the level of commitment required for successful international operations-commitment in terms of dollars to be invested. and research. It is an attempt to manage the effects of external. One market may offer immediate profit but have a poor long-run outlook. weaknesses. or organizational forms. and/or tactical. but the intricacies of the operating environments of the multinational corporation (i. Tactical planning. including existing commitments. home. In other words. For the company already committed. uncontrollable factors on the firm’s strengths. increasing competition. personnel for managing the international organization. it may be necessary to change the objectives. relative to the parent company’s objectives and resources. A strategic plan commits corporate resources to products and markets to increase competitiveness and profits. companies need such planning. and the ever-varying challenges of different national markets. and the task of controlling a multicountry operation create differences in the complexity and process of international planning. including management’s commitment and philosophical orientation to international business. market success requires long-term commitment. Planning relates to the formulation of goals and methods of accomplishing them. The degree of commitment to an international marketing cause reflects the extent of a company’s involvement. As markets grow increasingly competitive. A major advantage to a multinational corporation (MNC) involved in planning is the discipline imposed by the process. workable marketing program. A company uncertain of its prospects is likely to enter a market timidly.e.

The primary goal of Phase 2 is to decide on a marketing mix adjusted to the cultural constraints imposed by the uncontrollable elements of the environment that effectively achieve corporate objectives and goals. and/or costly mistakes in improper pricing. and (5) develop and implement a marketing action plan. Phase 2 : Adapting the Marketing Mix to Target Markets. resources. ground.625. The results of Phase 1 provide the marketer with the basic information necessary to: (1) evaluate the potential of a proposed country market. the task is more complex in foreign marketing because each country under consideration presents the foreign marketer with a different set of unfamiliar environmental constraints. and determining which products to develop or drop. Guidelines and systematic procedures are necessary for evaluating international opportunities and risks and for developing strategic plans to take advantage of such opportunities. a leading merchandiser of consumer electronic equipment in the United States. Radio Shack’s early attempts at international marketing in Western Europe resulted in a series of costly mistakes that could have been avoided had it properly analyzed the uncontrollable elements of the countries targeted for its first attempt at multinational marketing. countries are analyzed and screened to eliminate those that do not offer sufficient potential for further consideration. promotion. In Sweden the annual per capita consumption of coffee is 18 pounds. and other measures appropriate for the company’s products are examples of the evaluation criteria to be established.or old ones to withdraw from. The company staged its first Christmas promotion for December 25 in Holland. Once evaluation criteria are set. The process used by the Nestle Company is an example of the type of analysis done in Phase 2. When target markets are selected. the product manager for coffee must furnish answers to a number of questions. minimum profit. With the analysis in Phase 1 completed. INTERNATIONAL MARKETING Whether a company is new to international marketing or heavily involved. Each product manager has a country fact book that includes much of the information suggested in Phase 1. a complete analysis of the environment within which a company plans to operate is made. and income level and distribution vary among countries. standards of political stability. In which ways can the product. (4) determine which part of the marketing mix can be standardized 11. how is it brewed? Which coffee is preferred . an evaluation of potential markets is the first step in the planning process. A critical first step in the international planning process is deciding in which existing country market to make a market investment. products and one they expected to sell in Europe. the decision maker faces the more specific task of selecting country target markets. and beginning the process of creating marketing programs. In Germany. It is this stage in the planning process that more than anything else distinguishes international from domestic marketing planning. whereas a company guided by the domestic market extension concept seeks markets that accept the domestic marketing mix as implemented in the home market. advertising.Brazilian Santos blended with Colombian coffee. one of the company’s most lucrative U. A company guided by the global market concept looks for commonalties among markets and opportunities for standardization. In Belgium. (2) identify problems that would eliminate the country from further consideration. unaware that the Dutch celebrate St. the company overlooked a law requiring a government tax stamp on all window signs. distribution channels are underdeveloped. return on investment. The environment consists of the uncontrollable elements discussed earlier and includes both home-country and hostcountry restraints. or powdered? If it is ground. or robusta from the 149 © Copy Right: Rai University . products. marketing objectives. acceptable competitive levels. Phase I : Preliminary Analysis and Screening. the market mix must be evaluated in light of the data generated in Phase 1. while in Japan it’s half a gram!) How is coffee used-in bean form.2 A more detailed examination of the components of the marketing mix is the purpose of Phase 2. and distribution be standardized and in which ways must they be adapted to meet target market requirements? Incorrect decisions at this point lead to costly mistakes through lost efficiency from lack of standardization. Minimum market potential. The next step is to establish screening criteria against which prospective countries can be evaluated.S. Although an understanding of uncontrollable environments is important in domestic market planning. and other corporate capabilities and limitations. legal problems in various countries interfered with some of their plans. and poorly selected store sites resulted in many of the new stores closing shortly after opening. and promotional blunders. they were unaware that most European countries have laws prohibiting the sale of citizen-band radios. and objectives must be matched with a country’s constraining factors and market potential. Furthermore. A company’s strengths and weaknesses. Nicholas Day and gift giving on December 6. Emerging markets pose a special problem since many have inadequate marketing infrastructures. It is important to determine the reasons for entering a foreign market and the returns expected from such an investment. and any other company limitations or strengths that exist at the beginning of each planning period. A company’s commitment to international business and its objectives for going international are important in establishing evaluation criteria. (3) identify environmental elements which need further analysis. Information generated in Phase 1 helps a company avoid the mistakes that plagued Radio Shack Corporation. when it first went international. acceptable legal requirements. How does a German rank coffee in the hierarchy of consumer products? Is Germany a high or a low per capita consumption market? (These facts alone can be of enormous consequence. German courts promptly stopped a free flashlight promotion in German stores because giveaways violate German sales laws. price. These criteria are ascertained by an analysis of company objectives. The country fact book analyzes in detail a variety of culturally related questions. products inappropriate for the intended market. In the first part of the planning process. philosophies. Matching Company/Country for global companies or which part of and how the marketing mix must be adapted to meet local market needs. identifying problems and opportunities in these markets.

Marketing planning helps the marketer focus on all the variables to be considered for successful global marketing. and Phases 3 and 4 are developed individually for the target market whether it consists of a single country or a series of separate country markets. If there is no way to reduce the price. by whom. All marketing plans require coordination and control during the period of implementation.2 . additional research in this phase may provide information that can suggest ways to standardize marketing programs among two or more country markets. how it is to be done. continuous set of interacting variables with information continuously building among phases. the answer is clear: in the morning. Phase 2 also permits the marketer to determine possibilities for standardization. With the information developed in the planning process and a country market selected. This was the case for Nestle when research revealed that young coffee drinkers in England and Japan had identical motivations.) At what age do people begin drinking coffee? Is it a traditional beverage as in France. to bring the plan back on track should standards of performance fall short. The phases outline a crucial path to be followed for effective. Many businesses do not control marketing plans as thoroughly as they could even though continuous monitoring and control could increase their success. the planning process does not end at this point. at noon. A global company uses the same process but integrates planning and information to serve as many markets as feasible and then concentrates on a global market set in Phases 3 and 4. sales potential at the higher price may be too low to justify entry. The answers to three major questions are generated in Phase 2: (1) Which elements of the marketing mix can be standardized and where is standardization not culturally possible? (2) Which cultural/environmental adaptations are necessary for successful acceptance of the marketing mix? and (3) Will adaptation costs allow profitable market entry? Based on the results in Phase 2. Utilizing a planning process encourages the decision maker to consider all variables that affect the success of a company’s plan. is it a form of rebellion among the young as in England where coffee drinking has been taken up in defiance of tea-drinking parents. However. Regardless of which of the three strategies (domestic market extension. where Nescafe is considered a luxury gift item. Do the Germans drink coffee after lunch or with their breakfast? Do they take it black or with cream or milk? Do they drink coffee in the evening? Do they sweeten it? (In France. Phases 1 and 2 are completed for each country being considered. and flavor. Nestle produces 200 types of instant coffee.e two totally different coffees. or is it a gift as in Japan? There is a coffee boom in tea-drinking Japan. a decision not to enter a specific market may be made if it is determined that company marketing objectives and goals cannot be met. A global orientation facilitates the difficult but extremely important management tasks of coordinating and controlling the complexities of international marketing. the product manager can evaluate the marketing mix in terms of the information in the country fact book. the decision of the entry mode can be made. it becomes more difficult to efficiently manage all products across all markets. Also the price required to be profitable might be too high for a majority of the market to afford. Phase 3 : Developing the Marketing Plan. it is equally applicable for a company interested in a single country. The marketing plan begins with a situation analysis and culminates in the selection of an entry mode and a specific action program for the market. a second screening of countries may take place. a marketing plan is developed for the target market-whether a single country or a 150 © Copy Right: Rai University 11. “The Country Notebook-A Guide for Developing a Marketing Plan. With such depth of information. An evaluation and control system requires performance objective action. As a result.Ivory Coast? Is it roasted? Do the people prefer dark roasted or blond coffee? (The color of Nestle’s soluble coffee must resemble as closely as possible the color of the coffee consumed in the country. The specific plan establishes what is to be done. a product may have to be reduced in physical size to fit the needs of the market. analysis. but the additional manufacturing cost of a smaller size may be too high to justify market entry. While the model is presented as a series of sequential phases. By grouping all countries together and looking at similarities. Although the model depicts a global company operating in multiple country markets. Included are budgets and sales and profit expectations. On the other hand.” the international marketer can put the strategic planning process into operation. Phase 4-Implementation and Control INTERNATIONAL MARKETING A “go” decision in Phase 3 triggers implementation of specific plans and anticipation of successful marketing. from the dark robust espresso preferred in Latin countries to the lighter blends popular in the United States. Frequently. market characteristics that can be standardized become evident. instead of chocolates and flowers. black coffee-i. the planning process is a dynamic. multidomestic. Nescafe is toted in fancy containers to dinners and birthday parties.625. it provides the basis for viewing all country markets and their interrelationships as an integrated global unit. Furthermore. the results of the analysis in Phase 2 indicate that the marketing mix would require such drastic adaptation that a decision not to enter a particular market is made. or global) a company chooses. global market set. Just as in Phase 2. The next phase in the planning process is development of a marketing plan. As a company expands into more foreign markets with several products.) As a result of the answers to these and other questions. systematic planning. and when. that is. For example. with some countries dropped from further consideration. and planning are necessary for successful marketing. rigorous information gathering. By following the guidelines presented in Part VI of the text. aroma. Almost $50 million a year is spent in four research laboratories around the world experimenting with new shadings in color. The choice of mode of entry is one of the more critical At this stage of the planning process. coffee with milk. Nestle now uses principally the same message in both markets.

Indeed. Nike doesn’t make any athletic shoes.2 © Copy Right: Rai University . six factors must be taken into account in the sourcing decision. In Japan. the failure to seize an opportunity to license can also lead to dire con” sequences. Pokemon in the United States It started in Japan.S. and in 1997 the.S. owner of Pokemon (whose name means “pocket monster”). which featured a Mac-like graphical interface. Power Computing shipped 170. rolled out its own premium ice cream brands. the company that won the operating system war). providing the necessary performance clauses are in the contract. trade secret. for example. it was licensed to 4 Kids Entertainment.625. when Sony cofounder Masaru Ibuka obtained a licensing agreement for the transistor from AT&T’s Bell Laboratories. Logistics 3. Political Risk 5. 50 percent of children watch the Pokemon television show. 4 Kids decided to use the reverse introduction sequence of product introduction. Microsoft’s growing world dominance in computer operating systems and applications got a boost from Windows. It does not own any manufacturing facilities. an American-built product. Despite initial hesitancy on the part of Nintendo. what a company does not know can put it at risk. Exchange rate. In the United States. The only cost is the cost of signing the agreement and of policing its implementation. All its shoes are sourced in other countries. first introduced the video game. Despite these actions. licensees have a troublesome way of turning themselves into competitors to industry leaders. availability. And it became popular in Japan. and convertibility of local money. Pokemon is a licensing success story in the United States. This was followed by toys. Conversely. and the agreement may have a short life if the licensee develops its own know-how and capability to stay abreast of technology in the licensed product area. who spent many months improving high-frequency output. Perhaps the most famous U. Ibuka dreamed of using transistors to make small. The U. the United States imports more goods than it exports. licensing fiasco dates back to the mid-1950s. ‘These latter goods are referred to as’ soured goods and merit different marketing considerations than goods that are solely imported. Given its tremendous success in Japan. and trading cards. In analyzing the import statistics. Eyen more distressing. effort started with the television show and then 151 INTERNATIONAL MARKETING 11. The Mac clones have been very popular. Sourcing De3cision Factors 1.000 Macintosh clones in 1996. know-how. it was Sony’s high quality. the Regency. they advised him to try making hearing aids. Licensing can offer an attractive return on investment for the life of the agreement. Very popular. Apple belatedly reversed direction and licensed its operating system. Bell engineers informed Ibuka that it was impossible to manufacture transistors that could handle the high frequencies required for a radio. In the mid-1980s. the Pokemon television show was introduced: In Japan. Market Access 6. The licensed assume may be a patent. Of course. and. Additional International Alternatives Sourcing The opposite of exporting is obviously importing. When licensing technology or know-how. license fees. The antenna are all sourced in other countries under the specifications of Turk. or company name. How and why does a company select to employ this strategy? There are no simple rules to guide sourcing decisions. battery-powered radios. Turk.decisions for the firm because the choice will define the firm’s operations and affects all future decisions in that market. Apple’s failure to license its technology in the preWindows era ultimately cost the company over $125 billion dollars (the market capitalization of Microsoft. an industrial company known for its antennae. or some other form of compensation. and this trend appears to be increasing over the years. and marketing savvy that ultimately translated into worldwide success. However. This is especially true because licensing enables a company to borrow-leverage and exploitanother company’s resources. of New York. are purchased ready-made and goods that a foreign company has a voice in their design and packing. anything so easily attained has its disadvantages and risks. Sony was not the first company to unveil a transistor radio. imports can be subdivided into two categories: goods that. the sourcing decision is one of the cost complex and important decisions faced by a global company. Meiji learned important skills in dairy product processing. Licensing is a form of global market entry and an expansion strategy with considerable appeal. Inc. Potential returns from marketing and manufacturing may be lost. doesn’t produce a single antenna. As shown in Table. Nintendo. featured transistors from Texas Instruments and a colorful plastic case. Country Infrastructure 4. In fact. distinctive approach to styling. the marketing question became “Could this popularity be transferred to the United States?”Currently. Ibuka presented the challenge to his Japanese engineers. as the expiration dates of the licensing contracts drew near. In Japan. Meanwhile. first to Power Computing Corporation in December 1994 and then to IBM and Motorola. Sourced goods can be found in both consumer and industrial goods. The principal disadvantage of licensing is that it can be a very limited form of participation. Such a move would have allowed other computer manufacturers to produce Macintosh-compatible units. A company with advanced technology. comic books. A cartoon character that engaged in Japanese roleplaying was presented in a simplistic animated style. Factor costs and conditions 2. Licensing Licensing can be defined as a contractual arrangement whereby one company (the licensor) makes an asset available to another company (the licensee) In exchange for royalties. Finally. primarily in Asia. Meiji Milk produced and marketed Lady Borden premium ice cream under a licensing agreement with Borden. or a strong brand image can use licensing agreements to supplement its bottom-line profitability with little initial investment. Apple Computer chairman John Sculley decided against licensing Apple’s famed operating system. Undeterred. Mac clones had captured over 25 percent of the Mac market. Inc. the global market share for Macintosh and Mac clones has slipped below 5 percent.

the licensee shares its developments with the licensor. and watches. the licensing strategy must ensure ongoing competitive advantage. and-the government is becoming more concerned about what a company brings to the country in terms of jobs. materials. Besides the translation to J English. Companies that lack sufficient capital resources might seek ‘partners to jointly finance a project. spend considerable money to . In China.I eluding’ 4 million video games. of puns in the Japanese version. visions. England. any company that plans to remain in business must ensure that its license agreements provide for full cross-licensing-that is. and process applications. a joint venture may be the only way to enter a country or region if government bid award practices routinely favor local companies or if laws prohibit foreign control but permit joint ventures. replace all Japanese writing. and Latin America. manufacturing. and even modify some of the characters. Imageoriented companies such as Coca-Cola and Disney. logo. Overall. The reasons are fundamental: Investors achieve greater flexibility and control with a WFOE. companies may find that the upfront. approvals. In China.” In China. It is the practice whereby a company permits its name. resources. it is essential to work out a plan for approaching third-country markets as part of the venture agreement. for example. To avoid this. The U. access to markets has been hindered by what foreign investors thought was the essential success factor in China: guanxi (relationships). and interests. Because of these clear advantages. the conventional wisdom is that a joint venture is the only way to go. technology. and operations to be used in establishing a new firm or store. Mexico. international marketing capability and manufacturing. and services that it needs to do business in China.2 . Franchising is a form of licensing. cultural design. From a financial perspective. A bad licensee can seriously depreciate the value of a marque by turning out merchandise or services that do not meet up to the standard of the marque. but the bottom line is that the WFOEs take less time to establish than EJVs and do not require a board of directors. especially in emerging markets. At the absolute minimum. Investment: Joint Ventures A joint venture with a local partner represents a more extensive form of participation in foreign markets than either exporting or licensing. as well as designers such as Pierre Cardin. One path is a joint venture with the licensee. When companies do decide to license. The licensor receives between 5 and 15 percent of retail sales. They operate under similar rules and regulations. Such a company might link up with a foreign partner possessing considerable know-how in the area of technology. toys. easy money obtained from licensing turns out to be a very expensive source of revenue. This must be carefully thought out in advance. Today. according to Wilfried Vanhonacker. In China. example. Not all agree With this “wisdom. In fact. they have had to adjust for the wide usage. The advantages of this strategy include the sharing of risk and the ability to combine different value chain strengths-for. and know-how than it is about how its deals are structured. I New Zealand. Business is booming: The top-tier names are expanding their fee income by 15 percent a year and more. INTERNATIONAL MARKETING As the Borden and transistor stories make clear. To prevent a licensor/competitor from gaining unilateral benefit.The show is also being shown in Canada. or access to 152 © Copy Right: Rai University 11. The Pokemon cartoon was the 1998-1999 season’s top children’s show in the United States.625. the situation is changing rapidly. Merchandise sales were: estimated at a billion dollars in 1999. international licensing opportunities are not to be ignored. and today companies should think beyond the equity joint venture (EJV) with a well-connected local partner and consider the alternative of a wholly foreign-owned enterprise (WFOE). “westernize” the programs. Many investors have discovered to their disappoin1ment that their partner lacked the guanxi needed to move forward. The disadvantages of joint venturing can be significant. license their trademarked names and logos to overseas producers of clothing. In fast-growing and fastchanging environments. This means that licensees must be carefully ‘selected and supervised. When licensing a trademark. and what are the interests and capabilities of the partners going forward? The fact is that joint ventures are hard to sustain even in stable environments because the partners to a joint venture have different capabilities. Trademarks can be an important part of the creation and protection of opportunities for lucrative licenses. there is a shift on the part of foreign investors in China from the EJV to the WFOE. owners. EJVs and WFOEs are substantially the same in terms of taxation and corporate liability. a company should keep options and paths open for other forms of market participation. however. it is much more difficult to sustain joint ventures. They can also speed diffusion of new products or technologies. A WFOE can retain agents and advisors to assist it in acquiring the land.S. The main disadvantage of this global expansion strategy is that a company incurs very significant costs associated with control and coordination issues that arise when working with a partner. what many investors have discovered is that China is a big country and the scope of their partner’s guanxi is limited. The licensing agent receives 20 to 50 percent of the licensor’s fees. Clearly. each case must be decided on its merits. One of the main reasons for joint venture “divorce” is disagreement about third-country markets in which partners face each other as actual or potential competitors. as everywhere. There arc some technical differences.expanded with 90 different licensing agreements in. For example. the challenge is to ‘maintain and enhance the brand equity of the marque. licensing agreements should provide for a cross-technology exchange between all parties. One company might have in-depth knowledge of a local market. Insofar as is possible. Two questions must be answered in every case: What does each partner bring to the deal. Finally. license arrangements can create export market opportunities and open the door to low-risk manufacturing relationships. Australia. they should sign agreements that anticipate more extensive market participation in the future. an extensive distribution system. low-cost labor or raw materials. It is possible to use a joint venture as a source of supply for third-country markets. Joint venture partners must share rewards as well as risks. licensing can be quite I lucrative.

country of origin factors. supply and transportation and managing American workers-that have been subsequently applied at its Camry plant in Kentucky.Also. Is choice is to establish own organization. Cross-cultural differences in managerial attitudes and behavior can present formidable challenges as well.S. for example. SMH. A third critical role of marketing is its role in tapping opportunities in product development and research and development (R&D). The development of Canon’s AE-I camera is a case in point. SMH’s chief executive has presided over a spectacular comeback-the revitalization of the Swiss watch industry. 5. advantage can be gained by concentrating some of the marketing activities in a single location. 30 by 30 centimeters was the norm. the company best known for its line of inexpensive Swatch watches. whose models carry prices ranging from $700 to $20. Jamont uses committees to solve these and other problems as they arise.1S Another researcher found that 65 joint ventures with Japanese companies were either liquidated or. or other marketing activities. as noted earlier with licensing. marketing mix strategy: Goals and objectives in sales. positioning. Jamont. for-some country markets. must decide who to appoint to key positions. The issues that these alternatives raise are control arid ownership. for others. In some instances. a niche producer of luxury mechanical watches that retail for $200. recently acquired Blancpain’. third. might be at least partially concentrated in a single location for the world. The flagship brand on the high end is Omega. 2. However. by embracing the fantasy and imagination of childhood and youth. The most fundamental problem was the different benefits . must be dispersed to every country. there are many. and representatives. 35 by 35 centimeters’ was preferred. product positioning. Some chief executives are obsessed with manufacturing in their home country. far less engineering. and motivation of local distributors and agents. for example. Gillette. Nicolas Hayek is head of the Swiss Corporation for Microelectronics and Watch making (SMH). Research provided the information on market requirements that enabled Canon to develop a world product. Strategy implementation. Hayek has demonstrated that. The next task is the selection. The Swatch story is a triumph of engineering as well as a triumph of the imagination. As shown in Table. James River’s European joint venture. As for the form of cooperation and control. with sales approaching 1 billion watches. International Market Entry & Expansion Decision Model 1. distributors. The first relates to the configuration of marketing. agreement had to be reached on a standardized table napkin size. 3. and longer production runs. Training. Such advantages would have been lacking if Canon had developed separate camera models that were adapted to the unique conditions in each national market. Although many marketing activities must be performed in every country. Major problems included computer systems and measures of production efficiency. many companies have achieved great successes pursuing joint ventures. country-specific restrictions limit the share of capital help by foreign companies.000. Yet. Sourcing : Home. Difficulties such as those outlined previously are so serious that. In-country or in-region marketing organization? Cost.625. compared to American and European firms. including the transfer of relevant experience across national boundaries in areas such as global account management and the use of similar approaches or methods for marketing research. Cost. ending in “divorce” or a significant increase in the U. lower inventories. For example. some American managers involved in the venture complained that the manufacturing expertise they gained was not applied broadly throughout GM. brought together 13 companies from 10 countries. A second role for marketing is the coordination of marketing activities across countries to leverage a company’s know-how. a person can build mass-market products in countries such as Switzerland or the United States. transferred to the Japanese interest in 1976. GM has missed opportunities to leverage new learning. and motivation of agents. If it is decided to not establish an in-country marketing organization. and share of market.S. training. Toyota learned many new things from its partnership with GM about U. This integration can take many forms. the second issue that must be addressed in international marketing strategy is whether to establish an in-country or inregion marketing organization. ranging from the management contract to wholly owned subsidiaries and global strategic partnerships. The sourcing decision highlights three roles for marketing in a global competitive strategy. marketing mix strategy. This decision will be resolved by an assessment of the cost of creating such an organization compared to the expected impact of an in-country marketing organization on market share.000 and up. sales. a 600 percent increase. the agent(s) or INTERNATIONAL MARKETING 11. To the extent that this complaint has validity. market access. a dynamic joint venture partner can evolve into a stronger competitor. Service.that each side expected to receive. more than one third of 1. This was up from 6 in 1972. In an alliance the real payoff is from learning skills from the partner rather than just getting products to sell while avoiding investment. according to one study of 170 multinational firms. Swatch has become a pop culture phenomenon. Canon was able to develop a physically uniform product that required fewer parts. Investment: Ownership and Ontrol Another key variable in the location decision is the vision and values of company leadership. earnings. For example. and earnings. training. however. firm’s power over its partner. 4. Selection. Still. has used this strategy to introduce its shaving products in the Middle East and Africa. or host country. Japanese and Korean firms see to excel in their ability to leverage new knowledge that comes out of a joint venture. market impact assessment.100 joint ventures were unstable..2 © Copy Right: Rai University 153 .

Companies with wholly owned affiliates or subsidiaries have complete control over every aspect of the affiliates’ operations: strategy and structure. (In China this is now referred to as the wholly foreign-owned enterprise or WFOE. which are all U. In the equity joint venture (EJV). While the United States had been the leader in overseas purchases” European companies have purchased many U. Conversely. Although it is possible to have ownership without control and control without ownership. Alternatively. This is an especially important issue for publicly held companies. By producing locally. a local producer. Table 8-8 lists some additional examples. The most extensive form of participation in global markets is 100 percent ownership. There are many options that vary the amount of ownership and investment and the degree of control of country marketing. market. or higher profits. The ‘shared ownership of this type of company gives control to each of the owners. to implement the strategy.S. of companies that have pursued global expansion via acquisition. companies. Licensing and franchising require little investment. Foreign direct investment (FDI) figures record investment flows as companies invest in or acquire plant. grouped by industry. is investing $1 billion in China in an effort to preempt Fuji. in which it is assumed that the investor does not have significant influence or control. The alternatives discussed earlier-licensing. which may be achieved by start-up or acquisition. The desire for control and ownership of operations outside the home country drives . Connecticut. direct investment presumes that the investor has control or significant influence over the investment. Ralston Purina ended a 20year joint venture with a Japanese company to start its own pet-food subsidiary. Kodak. Several of the advantages of joint venture alliances also apply to ownership. British Petroleum. human resources. the German pharmaceutical company.K. a socket wrench manufacturer and developer of a cold-forming process that speeds up production and reduces waste.S. including access to markets and avoidance of tariff or quota barriers. For example. acquisitions still present the demanding and challenging task of integrating the acquired company into the worldwide organization and coordinating activities. joint ventures. or other assets outside the home country. finally. This will be done by the organization itself if it has created an in country marketing organization. and so on. companies and these transactions carry large price tags. has 20 percent of the market. Lucky Film Co.by means of establishing new facilities can be expensive and require a major commitment of managerial time and energy. ownership also permits important technology experience transfers and provides a company with access to new manufacturing techniques. Oil BP Amoco 5. Chairman Richard H. Amaco. Companies. a toolmaker with headquarters in New Britain. the time comes for many companies when a more extensive form of participation in global markets is wanted. Tobacco British American Tobacco 4. China is the world’s third largest film market after the United States and Japan. Despite these challenges.two other companies that have also recently disbanded partnerships in favor of wholly owned subsidiaries in Japan. equipment. The fourth task is to formulate marketing mix and positioning strategy and. but they may be part of agreements that give the licensor or franchisor considerable control over the business.19 In many countries.the decision to invest. and by the company ill cooperation with an agent or distributor if it has not. from expanding. Kodak would circumvent the 60 percent tariff on imported film. and PacifiCorp. These three deals alone are valued at over $133 billion. The operational definition of direct investment is ownership of 20 percent or more of the equity of a company. Ayers sees such global cross-fertilization and blended technology as a key benefit of globalization. are . companies. among them Taiwan’s National Hand Tool/Chiro company. government restrictions may prevent majority or 100 percent ownership by foreign companies.625. have acquired Air Touch Communications. Companies may move from licensing or joint venture strategies to ownership in order to achieve faster expansion in a market.2 © Copy Right: Rai University . respectively. Although full ownership can yield the additional advantage of avoiding communication and conflict-of-interest problems that may arise with a joint venture or co-production partner. financial strategy and policy. direct investment abroad and of foreign direct investment in the United States exceeds 1 trillion. Like joint ventures. Large-scale direct expansion . Monsanto Company and Bayer AG.. marketing strategy and policy. which controls more than 40 percent of the market. for example. greater control. there is an increasing trend toward foreign investment by. In 1991.distributor(s) selected will be the in-country marketing organization. Automotive Daimler Benz 2. the Stanley Works. Kodak currently has approximately 30 percent of the market. By definition. The market value of U. because of its stagnant sales in the U. and ownership-are in fact points along a continuum of alternative 11. and Scottish Power. Vodafone. Ownership/Investment After companies gain experience outside the home country via exporting or licensing and joint ventures. in addition to producing products. as opposed to portfolio investment. Stanley is now using the technology in the manufacture of other tools. Pharmaceutical Rhone-Poulenc 3. acquisition is an instantaneous-and sometimes less expensive-approach to market entry. has bought more than a dozen companies since 1986.S. greater ownership is normally linked with greater control (see Figure 8-1 on page 240). Communications Vodafone Target Chrysler Hoechst Zurich Arco Mannesmann Air Touch The decision to invest abroad-whether by expansion or acquisition-sometimes clashes with short-term profitability goals.) Ownership requires the greatest commitment of capital and managerial effort and offers 154 the fullest means of participating in a market. INTERNATIONAL MARKETING Market Entry and Expansion by Acquisition Product Category/Industry Acquiring Company 1. are products in themselves and it appears that many major international companies are on a shopping spree. this is not the case.

This is typically a starting point for most companies. Meanwhile. Joint ventures may be 50-50 partnerships or minority or majority partnerships. in nonfood products. is China’s fastest growing hair care brand. Strategy 1 concentrates on a few segments in a few countries. In many countries.. minority or majority equity stakes in another company. In recent years. it is ending licensing and joint venture arrangements for branded food products and setting up its own production. Foreign investments may take the form of minority or majority shares in joint ventures. and in creating its own command presence in the market. Inc. provide a much better communications link with the regional and world headquarters and. for example. The overall design of a company’s global strategy may call for combinations of exporting/importing. advertising. licensing.and control of the marketing effort and. companies must decide on their marketing strategy for each market. This approach has enabled P&G to increase its share of the urban shampoo market to 60 percent as compared to 9 percent for Unilever. The disadvantage of this option is that it does not create a company presence in the market and it does not give a company control over its marketing effort. alternatively. many ‘market ‘in a few countries. the Middle East. ensure that the company’s effort reflects the fullest potential of the company’s ability to execute a global strategy with local responsiveness. In strategy 2. Majority ownership may range anywhere from 51 percent to 100 percent. country concentration and segment diversification. INTERNATIONAL MARKETING 100% Control Company-owned Subsidiary 0 0 Agents/Distributors Ownership 100% Marketing Strategy Alternatives Regardless of the entry form selected. With a local subsidiary presence. UPS has made more than 16 acquisitions in Europe and has also expanded its transportation hubs. Department of Commerce. distribution. a company can focus on formulating and executing marketing strategies and plans that work. where cost-effective. joint ventures. This means the majority of American companies are pursuing strategy 1 or 2. This strategy was implemented by many European.2 © Copy Right: Rai University . In addition. or. and operating a joint venture with a third. Investment in Developing Countries Investment in developing nations grew rapidly in the 1990s. P&G has invested heavily in market research. and Africa. the alternatives are to use independent-agents and distributors or to establish a company-owned marketing subsidiary. market a opposed to going international with existing products or creating new global products: According to the U. seeking new country markets for already identified and served market segments. and marketing capabilities for dairy products. Major flows of investment have been directed toward emerging markets in Asia. Borden has maintained joint venture relationships with Japanese partners in flexible packaging and foundry materials. buying an equity stake in an Other. The appeal of the developing economies is their rapid growth. Head & Shoulders. These two dimensions in combination produce four strategic options.625. takes advantage of distributor and agent capabilities. Broadly. P&G’s brand. Unless a company is large and endowed with ample resources. with P&G marketing executives directing the company’s China strategy. this strategy may be the only realistic way to begin. It matches company resources and ‘market investment needs. The local presence of the company can Five Market Expansion Strategies Companies must decide whether to expand by seeking new markets in existing countries or. as shown in Table 8-10. the Americas. more than 80 percent of American ‘companies that export limit their sales to five or fewer markets. A firm may decide to enter into a joint venture or co production agreement for purposes of manufacturing arid may either market the products manufactured under this agreement in a wholly owned marketing subsidiary or sell the products from the co production facility to an outside marketing organization. and expanding markets. Such is the case in Japan for Borden. expanding purchasing power. It is also the’ approach of ‘ the American companies that decide to diversify in the U. Procter & Gamble (P&G) operates with a combination of joint venture-s and its own company presence. and ownership among different operating units.strategies or tools for global market entry and expansion. outright acquisition. as in the case of Sandoz and Gerber. This option gives the company local presence.S. The advantage of the agent/distributor option is the fact that it requires little investment. agents and distributors are not necessarily a no investment option. It is a pay-as-you-go option. 155 11. If the manufacturer has deep pockets. a company serves. As a result of these initiatives. A company may choose to use a combination of these entry strategies by acquiring one company. In China. Table 8-9 shows the sources of recent investment into Brazil. if it is well executed.S. any -termination of an agency or distributorship agreement may lead to a claim by the agent or distributor for lost profits and damages. A written contract with a no-cause termination clause is 110 guarantee of protection from an agent/distributor lawsuit because agents and distributors may press claims on the grounds of a breach of good faith. companies combine the company-owned marketing subsidiary with agents and distributors. and distribution. companies ‘that remained in Europe and sought growth by expanding into new markets.

country and segment diversification. is the classic global strategy whereby a company seeks out the world market for a product. multibusiness company such as Matsushita. General Electric (GE). design. The stage 3 multinational is the opposite: It sees the differences and is relatively blind to similarities.625. However. and others who are not familiar with the scholarly literature may use the terms in quite different ways. At the operating business level. Thus. therefore. the stage 2 international company sees extension market opportunities outside the home ‘country and extends marketing programs to exploit those opportunities. global. Strategy 4. The difference between the domestic and the international company is that the international is doing business in many countries. from domestic to international. Over all. and transnational. Concentration Diversification INTERNATIONAL MARKETING Home country is superior. Management’s orientation is either on global markets or global resources but not on both. multinational. is the corporate strategy of a global. however. The stage 2 ethnocentric company seeks to extend its products and practices to foreign countries. The appeal of this strategy is that by serving the world customer. Harley-Davidson is focused on global markets but not on global resources. For example.Strategy 3. Unfortunately. is ethnocentric or polycentric in its view of the rest of the world Worldview. Like the domestic company. Global Diversification Regiocentric 3. sees differences in foreign countries Ethnocentric Polycentric Concentration Diversification Sees similarities and differences in a world region. Country Focus COUNTRY 4. Until recently. it is ethnocentric and home-country oriented. At this point. sees similarities in foreign countrie s Each host country is unique. multinational. its orientation shifts from ethnocentric to polycentric. engineering. Matsushita. have an un assailable competitive advantage. consumer electronics. The stage 4 global company is a limited form of the transnational. Stage of Development I Stage & 1 Domestic 2 International Company Strategy Domestic International Model NA Coordinated Federation View of Home Extension World Country Markets Orientation Ethnocentric Ethnocentric 3 Multinational Multidomestic Decentralized Federation National Markets Polycentric 4 Global Global Centralized Hub Global Markets or Resources Mixed 5 Transnational Global Integrated Network Global markets and resources Geocentric Orientation does not change as a company moves from domestic to international. 1. Bartlett and Ghoshal provide an excellent discussion of three industries-branded packaged goods. international companies. sees similarities and differences in home and host countries. Both companies marketed globally but limited R&D. Success in overseas markets can boost a company’s total volume and lower its cost position. or manufacturing outside of the United States. Matsushita is multicountry in scope and its various business units and groups serve multiple segments. Narrow Focus 2. this is strategy 3-country diversification and market segment concentration. Unilever. The company has no interest in conducting R&D. For example. In Table 8-10. managers of individual units must focus on the needs of the world customer their particular global market. Philips. there is little general agreement about the usage of each term. the differences between the stages can be quite significant. The stage 4 global companies included in the study were all from Japan: Kao. a company can achieve a greater accumulated volume and lower costs than any competitor and. An increasing number of companies all over the world are beginning to see the importance of market share not only in the home or domestic market but also in the world market. P&G. 156 © Copy Right: Rai University 11. the same was true for BMW and Mercedes. The difference is quite important. and telecommunications switching-in which individual competitors have exemplified the different stages at various times in their corporate histories. The first change in orientation occurs as a company moves to stage 3. The focus of the stage 3 multinational is on adapting to what is different in a country. it should be noted that executives. and NEC. As discussed in previous chapters. It sees similarities outside the home country but is relatively blind to differences. Matsushita may be said to be pursuing strategy 4. This is the strategy of the well-managed business that serves a distinct need and customer category. Country Diversification Geocentric Alternative Strategies: Stages of Development Model Table lists the stages in the evolution of the global corporation.2 . For many years. The terminology suggested here conforms to current usage by leading scholars however. and Ericsson were stage 2. and International Telephone and Telegraph (ITT) were stage 3 multinationals.country diversification ‘and market segment concentration. at the level of corporate strategy. journalists.

the responsibility of the marketing unit is to realize the potential of the national market and. inc. Mercedes now plans to double its purchases from outside suppliers and to build more than 10 percent of its vehicles outside Germany. the role of each country is to contribute to the company worldwide. Research and development (R$D) in stage 2 is conducted in the home country. specialized. Unilever’s local responsiveness was well suited to the packaged goods industry. the role of the country unit is to adapt and leverage the competence of the parent or borne-country unit. it is equally important to know when to pull out. In the international and multinational. skills. and resources. GE’s Jack Welch decided to exit the business altogether) 11. Matsushita’s ability to serve global markets from world-scale plants caused great woes for Philips and GE. delivery. INTERNATIONAL MARKETING Role of country units Knowled ge Single country Home Country Adapting and leveraging competencies Created at center and transferred Exploiting local opportunities Retained within operating units Contributions to company worldwide All functions developed jointly and shared Special mention must be made of some of the distinctive qualities of stage 4 companies that pursue integrated global strategies. and interdependent. The transnational company in stage 5 can take advantage of resources as well as respond to local aspirations to produce a worldwide decentralized R&D program. In stage 5. the best person is selected for all management positions regardless of nationality. In stage 5. The role of country units changes dramatically as a company moves across the stages of development. Thus. in stage 3. On occasion. Table shoes an example of how fleet guard. The global company leverages internal skills and resources by taking advantage of global markets or global resources. whereas headquarters management positions are usually held by home country nationals. the most frequently preferred sourcing arrangement is local manufacture. for example-makes engines and transmissions in various countries and ships these components to assembly plants located in each of the world regions. in many markets. Ericsson gained a competitive edge over NEC and ITT by pursuing this approach. key jobs in host countries go to country nationals. if possible. Key assets are dispersed. and all other factors affecting competitiveness and profitabilility. which leverages the home –country organization. product sourcing is based on an analysis that takes into account cost. the best marketing and management efforts fail when trying to expand into markets. In the transnational.625. the responsibility of the marketing organization is to realize the potential of the individual national markets. When a company is in stage 2. This analysis produces a sourcing plan that maximizes both competitive effectiveness and profitability. evolved over an 11 year period. In the stage 5 transnational. its orientation encompasses both global markets and global resources Stage of Development II Stage & Company Key Assets 1 Domestic Located home country in 2 International Core centralized others dispersed 3 Multinational Decentralized and selfsufficient 4 Global All in home country except marketing or sourcing Marketing or sourcing Marketing or sourcing developed jointly and shared 5 Transnational Dispersed interdependent and specialized The transnational combines the strengths of each of the earlier stages by serving global markets using global resources and leveraging global learning and experience. Transnational Combines the strengths of each of the preceding stages in an integrated network. key jobs go to home country nationals in both the subsidiaries and the headquarters. Specialized design labs might be located in different countries and work together on the same project. (In fact. Helmut Werner. in stage 3. The multinational’s strength is its ability to adapt and respond to national differences. By the time is typically decentralized. design.engineering. In state 3. and manufacturing activity to Germany. Notes Mercedes chairman. a wholly owned subsidiary of commons engine company. In the stage 2 international company. The international company’s strength is its ability to exploit the parent company’s knowledge and capabilities outside the home country.. In consumer electronics. R$D becomes decentralized and fragmented.2 © Copy Right: Rai University 157 . Strengths at Each level International Ability to exploit the parent company’s knowledge and capabilities through worldwide diffusion of products Multinational Flexible ability to respond to national differences Global Global market or supplier reach. which leverages worldwide learning and experience. In the telecommunications industry. the company outperformed both Kao and P&G. to contribute to the success of marketing efforts worldwide by sharing successful innovations and ideas with the entire organization. A transnational automobile company-Toyota. “The fundamental problem of German exports is that we are producing in a country with a hard currency and selling in countries with soft currencies.” When a company moves from stage 4 to stage 5. In this case.

063 6 US Airways 77. sociocultural. of Aircraft 641 616 575 559 406 352 327 268 261 217 208 185 185 182 155 147 144 136 134 124 121 117 114 113 106 195. The Nature of Global Strategic Partnerships 2. a deodorizer. Trade barriers have fallen. the largest commercial airline in the world. This alliance is known as the Star Alliance. licensing. Thai.625. conservative brands. Alliances Between Manufacturers and Marketers 4. SAS. recent changes in the political.” -PETER DRUCKER.2 . United Airlines.166 2 FedEx 160. General Electric Corporation “Business growth and expansion in different parts of the world will increasingly have to be based on alliances.388 13 TWA 51. “ -MICHAEL PORTER Professor. Air New Zealand. Table lists the world’s top airlines and the world’s top airline fleets. Beyond Strategic Alliances What does a car.072 24 Aeroflot Russian 25. whose motto is “The Airline Network for Earth.398 3 United 115. . Tyrolean.081 7 Continental 68. markets have globalized. However. has agreements with fourteen airlines: Air Canada. partnerships. economic. Like the airline example cited previously. Lauda Air. Author “Alliances as a broad-based strategy will only ensure a company’s mediocrity. This age segment is composed of approximately 8 million consumers who want to express their own preferences and are cynical of traditional.267 8 British Airways 66. Singapore. All Nippon. such strategies will undoubtedly incorporate-or may even be structured around-a variety of collaborations. not its international leadership. Matsushita Electric. we reviewed the range of optionsexporting.679 22 Korean 27. be it local or foreign? Why do executives decide to pursue competitive collaboration with other firms. and a travel company have in common? In Japan the answer is a brand.199 11 UPS 55. Their purpose is to create a new. British Midland. and new communications technologies and trends have emerged.405 5 Northwest 79. modern image that would appeal to consumers in their late twenties and early thirties. Cooperative Strategies in Japan: Keiretsu 6. They are critical to win on a global basis. Five major companies (Toyota Motor. product life cycles have shortened.812 10 Lufthansa 59. Austria. household appliance personal computer a beer. Once thought of as only joint ventures with the more dominant party reaping most of the benefits (or losses) of the partnership. there are strong strategic implications for the global organization and new challenges for the global marketer.901 9 Southwest 63. Harvard Business School The learning objectives from this lesson could be as follows: 1. cross-border alliances are taking on surprising new configurations and even more surprising players.219 14 Air France 45. Mexican. and Varig airlines.784 25 Airborne " Revenue passenger kilometers In previous lessons. Why would any firm-global or otherwiseseek to collaborate with another firm.898 4 Delta 98. the least attractive way to try to win on a global basis is to think you can take on the world by yourself”.154 21 Continental Express 27.” Top25 Airlines Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Airline United American Delta Northwest British Airways Japan Airlines Continental Lufthansa US Airways Air France Qantas KLM Singapore All Nippon Southwest TWA Korean Cathay Pacific Air Canada Alitalia Thai Intl Iberia Swissair America West Canadian 1997 Rank No. Airlines offer an excellent example of global strategic partnerships. Lufthansa. Success Factors 3.522 23 KLM 26. joint ventures and all kinds of relations with organizations located in other political jurisdictions. joint ventures.INTERNATIONAL MARKETING LESSON 16: COOPERATIVE STRATEGIES AND GLOBAL STRATEGIC PARTNERSHIPS “Alliances are a big part of this game [of global competition}.372 1 American 172. -JACK WELCH CEO. some of which are rivals? 158 © Copy Right: Rai University 11. and technological environments of the global firm have combined to change the relative importance of those strategies. Although these developments provide unprecedented market opportunities. Asahi Breweries and Kao) have formed a marketing alliance to share the brand name “Will.002 20 Iberia 31.962 18 All Nippon 36.1 90 . consumer needs and wants have converged.17 Alitalia 38.470 16 SAS 40.623 15 Air Canada 40. International Partnerships in Developing Countries 5. of RPK Top 25 Airline Fleets Airline No.418 12 Mesa Air Group 55. Ansett Australia. . and ownership-traditionally used by companies wishing either to enter global markets for the first time or expand their activities beyond present levels.866 19 Japan Airlines 36.

It is distinguished by the following six attributes: 1. First. GSPs are attractive for several reasons. it was unlikely that any of the partners has the ability or the desire to acquire Motorola’s unique strength. continual transfer of resources laterally between partners is required. Motorola formed an alliance to exploit a unique strength. The relationship is reciprocal. this was part of the rationale for Boeing’s partnership with a Japanese consortium to develop a new jet aircraft. 3. Like traditional joint ventures.625. Two or more companies develop a joint long-term strategy aimed at achieving world leadership by pursuing cost leadership. It will focus on global strategic partnerships. Iridium failed. The partners’ vision and efforts are truly global. If the relationship is along vertical lines. In fact. As suggested in the opening chapter quotations. 5. Iridium was an alliance based on skills. the participants retain their national and ideological identities. 3. Gallo. Professor Emeritus at the Tuck School. both parties to the relationship must understand their core strengths and be able to defend their competitive position against the possibility of either a forward or backward integration move by their vertical partner. Each partner possesses specific strengths that it shares with the others. or a combination of the two and by creating a variety. The firm of tomorrow must be ready to do whatever it takes to ensure that it is creating a unique value for customers and that it has a competitive advantage. when all was said and done. The lesson is that getting all of the alliance elements aligned is of no use if the product does not offer a unique value. A broad spectrum of inter firm agreements. the largest producer of athletic footwear in the world. Iridium was overtaken by cellular and by alternative and more realistic satellite projects. 4. The phrases collaborative agreements strategic alliances. and there are potential risks associated with strengthening a competitor from another country. and global strategic partnerships (GSPs) are frequently used to refer to linkages between companies to jointly pursue a common goal. Reaction time has been sharply cut by advances in technology.2 © Copy Right: Rai University 159 . including joint ventures can be covered by this terminology. Second. The Iridium program described in the box” Iridium: Anatomy of Marketing Failure” embodied several prerequisites that experts believe are the hallmarks of good alliances. differentiation. Gallo. capital. chairman of British Aerospace offers a straightforward reason why a firm would enter into a GSP:”A partnership is one of the quickest and cheapest ways to develop a global strategy.Every company faces a business environment characterized by unprecedented degrees of dynamism. makes little more than cockpits and wings While outsourcing manufacturing for many companies might be a tactical response dedicated to some immediate cost savings. the largest wine company on earth. extending beyond home countries and home regions to the rest of the world. rather than focusing on a particular market or product.” Professor Gary Hamel of the London Business School has observed that the partner that proves to be the fastest learner can ultimately dominate the relationships 11. 1. partnerships may be the best means of securing access to national and regional markets. and other key strategic areas. Traditional joint ventures are basically alliances focusing on a single national market or a specific problem. know-how. Finally. 2. This chapter will address the fundamental issue: whether to cooperate and when to cooperate. Despite these drawbacks. there appears to be less than agreement by major strategic thinkers on the wisdom of cooperation. First. namely. learning must take place on all sides. Nike. The participants remain independent subsequent to the formation of the alliance. Third. and unpredictability. turbulence. does not grow a single grape. As James Brian 0uinn. Third. the Iridium alliance partners possessed unique strengths of their own. Second. 2. the preeminent aircraft manufacturer. However. The participants make ongoing contributions in technology. Today’s firm must be equipped to respond to mounting economic and political pressures. and technology.? However. partnerships provide important learning opportunities. The participants share the benefits of the alliance as well as control over the performance of assigned tasks. it is clear that Nike. 6. Each partner must be willing to sacrifice some control. Roland Smith. Fourth. Although these vertical arrangements may be INTERNATIONAL MARKETING The Nature of Global Strategic Partnerships The terminology used to describe the new forms of cooperation strategies varies widely. and that they could view their supplier arrangements as strategic. the 77~. When competing in markets excluded from the partnership. the technology requirements of many contemporary products mean that an individual company may lack the skills. The upward trend for GSPs comes in part at the expense of traditional cross-border mergers and acquisitions. high product development costs may force a company to seek partners. its leadership in wireless communications. According to estimates the number of strategic alliances has been growing at a rate of 20 to 30 percent since the mid-1980s. in fact. with technology sharing and resource pooling representing norms. GSPs and joint ventures differ in significant ways. GSPs have some disadvantages. products. or access-based position or a combination of the three. or know-how to go it alone. A true global strategic partnership is different. does not manufacture a single shoe. the strategic alliances discussed in this chapter exhibit three characteristics. one expert regards GSPs as a “race to learn. and various other types of cooperation strategies that may be an important element of the success of the global firm. pointed out. Nike’s ability to outsource its manufacturing to multiple low-cost producers in the Far East has been a critical component of its success. and they must work together to create a unique value for the customers of the downstream partner in the value chain. strategic international alliances.. and Boeing put significant thought into establishing their supply chains. needs. The Japanese keiretsu. If the relationship is organized along horizontal lines. and Boeing.

Partners must be viewed as equals. this slogan was referring only to their world-wide service-the phone could not be used inside buildings or moving cars. Unfortunately. engineers. 2. Its business consisted of a global satellite network of 66 satellites and the manufacture of digital phones and chips. anywhere. Iridium is an example of technology in search of a market. there are winners and there are losers. Instructions for using the phone were difficult to understand. Culture. it is necessary to consider the following six basic factors that are deemed to have significant impact on the success of GSPs: 1. The hospitality company provides superior service as compared to what the university could do itself. and owned 18 percent of Iridium. An example of a strategic relationship of partners along vertical lines is in lean manufacturing. A direct mail campaign in numerous international markets and employing 20 different languages was utilized. provided product systems and financing. 6. The Iridium project cost an estimated $5 billion in 1998. Fortune. 4. A company may establish separate GSPs with different partners strategy must be thought out up front to avoid conflicts. 2. This kind of cooperation can strengthen the competitive advantage of each of the partners by enabling them to identify and concentrate on their core strengths. The primary was international business travelers a market es-timated to be about eight million. as is the successful development of a shared set of values. successful Collaborators will be guided by the following four principles: 1. Personal chemistry is important. Iridium spent $140 million in media to launch the product. which thought it had the resources and strategy to be a leader in the telecommunications industry. even though the legal link between the supplier and buyer is limited to the purchase agreement. was blamed in part on the fact that the former was run by finance-oriented executives and the latter by engineers. and thereby enables the university to be a more effective competitor in its market. In the end.000 and air time ranged from $3 to $7 per minute. Their slogan was “Anytime. superior quality. INTERNATIONAL MARKETING Success Factors Assuming that a proposed alliance meets the six prerequisites just outlined. they are not alliances unless the partners are linked in a long-term relationship. consumers have insisted that the buyer be held responsible for working conditions in the supplier company. The advertising campaign generated over one million sales leads. the fundamental and critical reason for failure was the total lack of mar-keting analysis and realistic marketing planning. The relationship is strategic because it enables the company to create greater value for its customers.625. Irid-ium. 3. Governance. Harmony is not the most important measure of success. This kind of cooperation can lead to shorter design cycles. Companies forming GSPs must keep these factors in mind. As noted earlier.” Unfor-tunately. the project was driven by a technological vision that ignored both the competition and the consumer. design key components of the automobile. 3. If they are not then they are simply supply agreements.’ and only 25. As if all these conditions weren’t enough to con-demn the product to failure.” It weighed 500g versus 120g for most cell phones. Their advertisements appeared in The Wall Street Journal. Potentially divisive issues must be identified in advance and clear. learning from partners is critically important Nike and many other companies have faced a growing consumer concern about the working conditions in supplier companies. Strategy. unitary lines of authority established that would result in commitment by all partners. Mission. Moreover. and required sev-eral attachments.2 . Another example of a strategic relationship is a university that contracts with a hospitality company to provide management services for lodging and meal service at a training center. All employees. Iridium: Anatomy of a Marketing Failure In the spectrum of companies operating in the global marketplace. some conflict is to be expected. in which participants pursue objectives on the basis of mutual need or advantage. Although marketing alone is rarely the sole cause of failure. Despite the fact that partners are pursuing mutual goals in some areas. Iridium was supposed to revolutionize the telecom-munications industry. in the case of Iridium. What actually happened? The Iridium phone was described by users as a “brick-like device. and managers must understand where cooperation ends and competitive compromise begins. there was not guarantee for the security of the system. From the beginning. ended up as one of the most expensive marketing failures in history. The phone cost $3. Successful GSPs create win-win situations. a major investor. The product had not been properly tested. Innovative structures and designs may be needed to offset the complexity of multi country management. partners must remember that they are competitors in others. Its unique feature was that it could provide service anywhere in’ the world.000 users could be serviced at one time. The failure of a partnership between Britain’s General Electric Company and Siemens A. for example. G. the company bungled this effort by not adequately fol-lowing up on these leads. the assembler of an automobile relies on suppliers to not only build but to also 160 © Copy Right: Rai University 11. other business publi-cations and airline magazines. The company was a consortium with many diverse partners from around the world. Essentially. 5 Organization. Management GSPs invariably involve a different type of decision-making. Motorola.critically important to the success of the firm. Discussion and consensus must be the norms. and lower cost but it will not occur unless there is a mutual commitment to work together and a confidence on both sides that the two parties will not invade each other’s domain. it failed because it failed to create a unique value in a competitive marketplace. the first samples of the product were late in delivery and experienced software problems. 4.

a partnership between General Electric’s (GE’s) jet engine division and Snecma. especially if the latter’s manufacturing skills are the attractive quality. These companies may find themselves at a disadvantage in GSPs with a supplier. and other components. The partnership thrives despite each side’s differing views regarding governance. But that isn’t what they set out to create. with Europe as the starting © Copy Right: Rai University 161 . Much like a corporate communications department. problems between partners had less to do with objective levels of performance than with a feeling of mutual disillusionment and missed opportunity. and organization. had set their sights on overseas growth. “Our partner came in looking for a return. some companies involved in GSPs establish a collaboration section. the partnership in the mid-1980s between AT&T and Italy’s Olivetti appeared to be a winner: The collective mission was to capture a major share of the global market for information processing and communications. 11. say. caused by differences in management philosophy expectations. AT &T executives. is a frequently cited example of a successful GSP. informal transfers of information. the French prefer to approach problem solving with copious amounts of data. All functions within the alliance may be affected and performance is likely to suffer as a consequence.625. AT&T/ Olivetti-A Failure In theory.2 Another common cause of problems is frictional loss. The higher-income country managers and engineers must also learn to be more receptive and attentive-they must overcome The “not inventedhere” syndrome and begin to think of themselves as students. The result is corporate amnesia. Said one Japanese manager. these four problems will almost always ensure that the Japanese partner will be the only one in it for the long haul. They contract out the manufacturing or service activities in the value chain to companies that can supply product at a lower cost than is possible with manufacturing inhouse. while the Western partner sought relatively quick and risk -free financial returns. The study identified four common problem areas in alliances gone wrong. is likely to be a less competent player or even one from outside the industry. not teachers. Each must contribute to the alliance. Those involved in the venture may perform only two. The best long-term partner. This is a very thin line to walk. Now they complain that they didn’t build a business. boosters. little or no corporate memory is built up on how to compete in Japan. The partnership resulted in the development of a highly successful new engine that. however. Unfortunately for the marketer.” The Japanese partner stated that “the foreign partner took so long to decide on obvious points that we were always too slow. A report by McKinsey and Company shed additional light on the specific problems of alliances between Western and Japanese firms. and approaches. a government-owned French aerospace company. Finally. They must develop safeguards against unintended. the $800 million in development costs was more than GE could risk on its own. a company’s manufacturing excellence represents a multifaceted competence that is not easily transferred. management. Although many companies source in lower-wage countries. The alliance got off to a strong start because of the personal chemistry between two top executives. whereas GE prefers to bring in experienced people from within the organization. INTERNATIONAL MARKETING Case Examples of Partnerships CFM Imitational/ GE/Snecma-A Success Story Commercial Fan Moteur (CFM) International. At the same time.or three-year assignments. which stifle decision making. The original goals of the venture will be lost as each new group of managers takes their turn. To limit transparency. Often. senior vice president of GE’s engine group.16 Olivetti had what appeared to be a strong presence in the European office equipment market. Such gate keeping serves an important control function those guards against unintended transfers. has noted that the French like to bring in senior executives from outside the industry. some new technological skills. A second area of concern is the balance between partners. While GE focused on system design and high-tech work. Brian Rowe. whereas Americans may take a more intuitive approach is Still. to date has generated tens of billions of dollars in sales to 125 different customers. they must learn to be less eager to show off proprietary lab and engineering successes. When taken collectively. that is. having just presided over the divestiture of their company’s regional telephone units. the study found that short-term goals can result in the foreign partner’s limiting the number of people allocated to the joint venture. The most attractive partner in the short run is likely to be a company that is already established and competent in the business with the need to master. “Our partner just wanted to go ahead and invest without considering whether there would be a return or not. The goal is to limit the transparency of their operations. One team of researchers notes the following: The challenge is to share enough skills to create advantage vis-avis companies outside the alliance while preventing a wholesale transfer of core skills to the partner. Speaking of his Japanese counterpart a Western businessperson said. GE’s Gerhard Neumann and the late General Rene Ravaud of Snecma. and each must depend on the other to a degree that justifies participation in the alliance. They got it. senior executives from both sides involved in the partnership have been delegated substantial responsibility. also. Alliances Between Manufacturers and Marketers Many companies have decided to source their product from suppliers. even domestic companies are outsourcing tasks to achieve greater efficiency.”14 Such differences often cause much frustration and time-consuming debates. this department is designed to serve as a gatekeeper through which requests for access to people and information must be channeled. Companies must carefully select what skills and technologies they pass to their partners. Also.The issue of learning deserves special attention. The first problem was that each partner had a different dream: the Japanese partner saw itself emerging from the alliance as a leader in its business or entering new sectors and building a new basis for the future. GE was motivated in part by the desire to gain access to the European market so it could sell engines to Airbus Industries. the French side handled fans.

in the words of one observer. Digital’s recent joint venture agreement with the Hungarian Research Institute for Physics and the state-supervised computer systems design firm Szamalk is a case in point. In 1993. Yan found that success is more a matter of managerial capacity. especially in high-tech industries. testing. “resembles a fighting clan in which business families join together to vie for market share. Presently. and Japanese firms. but the question of whether alliances are the best way to go to gain market access must be carefully evaluated. Mexico. “I don’t think we or Olivetti spent enough time understanding behavior patterns. Stage Three: Growing levels of value-added components move abroad Stage Four: Manufacturing skills. Boeing/Japan-A Controversy GSPs have been the target of criticism in some circles. Coca-Cola has been successful while PepsiCola is not. citing a decline in CIR’s value. “If you’re not making money in China now.625. Keiretsu relationships are often cemented by bank ownership of large blocks of stock as well as cross-ownership 162 © Copy Right: Rai University 11. that is. and product portfolio than length of stay. that vision was nothing more than a hope: There was no real strength in Olivetti in the computer market. the 777. Rick Yan states. AT&T promised its partner $260 million and access to microprocessor and telecommunications technology. and future avenues of product derivatives leave Stage Six: Core skills surrounding components. The partnership called for AT&T to sell Olivetti’s personal computers in the United States. In China. and complex systems integration move abroad. “We knew the culture was different but we never really penetrated. AT&T group executive Robert Kavner cited communication and cultural differences as being important factors leading to the breakdown of the alliance. Critics warn that employees of a company that become reliant on outside suppliers for critical components will lose expertise and experience erosion of their engineering skills. Keiretsu exist in a broad spectrum of markets. Asia. Like the early joint ventures between American and Japanese firms. in return. (CIR). One team of researchers has developed a framework outlining the stages that a company can go through as it becomes increasingly dependent on partnerships. The Japanese were to contribute between $1 billion and $2 billion. Coca-Cola sought equity stakes and management Control in its joint ventures. to move closer to the customer by introducing its own brand into the marketplace. in turn.point. potential partners will trade market access for know-how. It is not enough to have a local partner-marketing and management are also critical. and Central and South America offer exciting opportunities for firms seeking to enter gigantic and largely untapped markets. Stage One: Outsourcing of assembly for inexpensive labor Stage Two: Outsourcing of low-value components to reduce product price. Olivetti. Although the 717 project was shelved in 1988.S. Unfortunately. For example. and component parts markets. AT&T sold its remaining stake.great deal of controversy. A keiretsu is an inter business alliance or enterprise group that. An obvious strategic alternative for entering these markets is the strategic alliance.A. generated a. Stage Seven: Competitor learns the entire spectrum of skills related to the under lying core competence The next stage is obvious: The partner now has the complete manufacturing skill set and capability and may decide to push for forward integration. The project’s $4 billion price tag was too high for Boeing to shoulder alone. Although investment spending is understandable in developing countries. and functionally related technologies move abroad Stage Five: Disciplines related to quality.”17 In 1989. A Central European market with interesting potential is Hungary. Critics envision a scenario in which the Japanese use what they learn to build their own aircraft and compete directly with Boeing in the future-a disturbing thought because Boeing is a major exporter to world markets. precision manufacturing. When regulations were eased. would sell AT&T computers and switching equipment in Europe. and Kawasaki. and Olivetti had no experience or capability in communications equipment. designs. miniaturization. a new wide-body aircraft. they would get a chance to learn manufacturing and marketing techniques from Boeing. He concludes that companies who tolerate poor short-term results in the mistaken belief that such results are a trade-off for future probability should reexamine their strategies. a proposed alliance between Boeing and a Japanese consortium to build a new fuel-efficient airliner. Such criticism is often directed at GSPs involving U. Fuji. was developed with about 20 percent of the work subcontracted out to Mitsubishi. the top 200 joint ventures in China are growing at an average compound annual growth rate of 38 percent at an 8 percent after-tax margin. and they would get upset. AT&T cashed in its Olivetti stake for a share in the parent company Compagnie Industrial Riunite S. many multinational companies have taken a long-term strategy too far and are rethinking their joint venture efforts in China. Underpinning the alliance was the expectation that synergies would result from the pairing of companies from different industries-communications and computers. Tensions ran high when sales did not reach expected levels. there’s little chance you will without changing your strategy. multinational companies are required to take local partners and many are doing quite well. Corporative Strategies in Japan: Keiretsu Japan’s keiretsu represent a special category of cooperative strategy.2 . It has also provided investment incentives to Westerners.” Kavner said. the underlying importance of the venture was to stop the cloning of Digital’s computers by Central European firms. Pepsi failed to do this until much later. Hungary already has the most liberal financial and commercial system in the region. INTERNATIONAL MARKETING International Partnerships in Developing Countries Central and Eastern Europe.p. the 717. We would get angry. including the capital market primary goods markets. critical mass scale. This former communist economy has its share of problems. Though the venture was formed so Digital will be able to sell and service its equipment in Hungary.

some are independent). One supplier is Koit’s Toyota owns about one fifth of Koito’s shares and buys about half of its production. they have an incentive to be flexible and adaptable. and exclusive supply arrangements. Because Toyota buys a given component from several suppliers (some are in the keiretsu. Mitsui Group and Mitsubishi Group are organized around big trading companies. and Quasar brands. Toyota. Some observers have disputed charges that keiretsu have an impact on market relationships in Japan.2 suppliers receiving long-term contracts. Canon.S. As result. with revenues approaching $1 trillion. a steel maker (USX). Groupings of firms in different industries and countries will be held together by common goals that encourage them to act almost as a single firm.. with 11. Today. and approximately one quarter of its sales. together with the I Sumitomo. Japan’s other major consumer electronics manufacturers.g. compared with 50 percent for GM. as well as share information and coordinate prices in closed-door meetings of “presidents’ councils. In absolute terms. and other Japanese companies have also been accused of restricting the availability of high-tech products in the U.000 National stores in Japan. Others acknowledge the past significance of preferential trading patterns associated with keiretsu but assert that the latter’s influence is now weakening. These alliances can effectively block foreign suppliers from entering the market and result in higher prices to Japanese consumers.of stock between a company and its buyers and non financial suppliers. and. This type of alliance is not driven simply by technological change but by the political necessity of having multiple home bases. the early 1950s as regroupings of four large conglomerates-zaibots/I-that dominated the Japanese economy until 1945. 50 to 80 percent of whose inventory consists of Matsushita’s brands. price discrimination. (The term virtual is borrowed from computer science. 163 © Copy Right: Rai University . Global competition in the era of keiretsu means competition exists not only among products but also between different systems of corporate governance and in dustrialorganization.000 secondary suppliers. For example. They were dissolved after the occupational forces introduced antitrust as part of the reconstruction. and DKB groups. Matsushita controls a chain of 25. enjoy the political advantage of being a “local” firm almost anywhere. for companies competing with the Japanese or wishing to enter the Japanese market. they accounted for an astonishing 78 percent of the market valuation of shares on the Tokyo Stock Exchange. Annual revenues in each group are in the hundreds of billions of dollars.625. risk sharing. some computers feature virtual memory that allows them to function as though they have more storage capacity than is actually built into their memory chips. However.” Thus. and long-term employment. In addition to the big six. have similar alliances (Sony’s chain of stores is much smaller and weaker by comparison). These two. the virtual corporation “will Seem to be a single entity with vast capabilities but will really be the result of numerous collaborations assembled only when they’re needed. Another perspective on the future of cooperative strategies envisions the emergence of the virtual corporation. the U. an electrical products company. the virtual corporation could combine the twin competencies of cost-effectiveness and responsiveness. (GE). Manufacturing keiretsu show the gains that can result from an optimal balance of supplier and buyer power. since Toyota’s suppliers do not work exclusively for Toyota. bringing new configurations to the basic forms described previously. a third of Japan’s business capital. circumvent antitrust barriers. has a network of about 175 primary and 4. FuYo. Hitachi.01 percent of all Japanese companies. INTERNATIONAL MARKETING Beyond Strategic Alliances The relationship enterprise is said to be the next stage of evolution of the strategic alliance. keiretsu constituted less than’ 0. As the hypothetical example from America suggests. More than the simple strategic alliances we know today. for example. Vertical supply and distribution keiretsu are alliances between manufacturers and retailers. keiretsu executives can legally sit on each other’s boards. Japan’s Fair Trade Commission appears to favor harmony rather than pursuing anticompetitive behavior.” On a global level. Inter group operations and systems are closely integrated. Another type of manufacturing keiretsu outside the big six consists of vertical hierarchical alliances between assembly companies and suppliers and component manufacturers. and a computer firm (IBM) were interconnected rather than separate firms. through which it sells its Panasonic. relationship enterprises will be super alliances among global giants. make up the “big six” keiretsu. As many observers have noted. subsidiaries of Japanese companies if the parent company is found guilty of unfair trade practices in the Japanese market. while at the same time resulting in corporate stability. The practices described here lead to the question of whether or not keiretsu violate antitrust laws. a general understanding of keiretsu is crucial. Techniques. what it would mean in the United States if an automaker (e. The net result of this arrangement is that Toyota produces about 25 percent of the sales value of its cars. with home bases in all major markets. the Japanese government frequently puts the interests of producers ahead of the interests of consumers. Each group I strives for a strong position in each major sector of the Japanese economy. but there can be no doubt that. All are fierce competitors in the Japanese market. They would be able to draw on extensive cash resources.) As described in a Business Week cover story. including Toshiba and Hitachi. Sanwa. Imagine. market. About half of Matsushita’s domestic sales are genera led through the National chain. The Justice Department has considered prosecuting the U. several other keiretsu have formed. claiming instead that the groups primarily serve a 60cial function. keiretsu are essentially cartels that have the government’s blessing. In fact.S. General Motors [GM]). Federal Trade Commission has launched several investigations of price fixing.S. for example. Also. some pf Japan’s biggest and best-known companies are at the center of keiretsu. For example. the keiretsu were formed in. discipline is imposed down the network. Furthermore. It is beyond the scope of this chapter to address these issues in detail.

As noted. IKEA has 14 outlets in major metropolitan areas. which calls for each of us to do a little in order to save a lot. As described by Davidow and Malone.here it plans to open a total of 10 outlets. The United Kingdom represents the fastest-growing market in Europe. it’s not for you. 164 © Copy Right: Rai University 11. Ingvar Kamprad. distributed databases.2 . two thirds of IKEA’s North American advertising budget is allocated forty.S. Also. The quality of much of what they sell is good. They value our low prices. Today. This reflects the trend toward mass customization. Sustained differentiation depends on continued perceived value and the absence of imitation by competitors. “The success of a virtual corporation will depend on its ability to gather and integrate a massive flow of information throughout its organizational components and intelligently act upon that information. IKEA opened several stores in Central and Eastern Europe (Poland is one of its fastest. As Bradley explains. some furniture was designed specifically for the cramped living styles typical in former Soviet bloc countries. The same forces that are driving the formation of the digital keiretsu-high-speed communication networks. And almOst all of them say they will come back &gain. IKEA’s approach to the furniture business has enabled it to rack up impressive growth in an industry in which overall sales have been flat. “Our customers understand our p~ilosophy.” Why has the virtual corporation suddenly burst onto the scene? Previously. John Sttnik. store in Philadelphia in 1985. can take more investment risks. fashions change. Inc. “Their market is finite because it is so narrow. and open systems make possible the kinds of data flows required for the virtual corporation. Kamprad firmly believes in long-term investment and states: “It will take twenty-five years to furnish Russia.330 suppliers in 64 countries helps the company maintain its low-cost position. IKEA’s international growth has been quite successful but probably would not have been possible if the company had gone public according to its founder.. which often suffers from a need to show short-term profits. Ford provides an interesting example of how technology is improving information flows among the far-flung operations of a single company. are irked to find popular items are sometimes out of stock. The issue of sustainability is ‘central to this strategy concept. Throughout Europe. First. “We distanced ourselves from the other furniture stores. IKEA has also opened two stores in China but is having difficulty securing local suppliers and positioning for one store that is located in a shopping mall. Sourcing furniture from more than 2. Complained one shopper. Another problem is the long lines resulting from the company’s no-frills approach. chief operating officer of Lexington Furniture Industries.thus. cost leadership is a sustainable source of competitive advantage only if barriers exist that prevent competitors from achieving the same low costs. Industry observers predict the United States with eventually be IKEA’s largest market (presently it accounts for 15 percent of IKEA’s volume). by definition. an executive at IKEA’s U. design. and in flexible production lines.625. “If we offered more services. the concept. but the hassles make you question whether it’s worth it. IKEA benefits from the perception that Sweden is the source of high quality products. president of Levitz Furniture in Boca Raton.S. it could pursue the “think global. therefore.. poor execution. for example-are embodied in the virtual corporation As noted by Davidow and Malone. “Great idea. “IKEA is on the way to becoming the Wal-Mart stores of the home-furnishing industry.” INTERNATIONAL MARKETING IKEA Cost Focused IKEA. Germany currently accounts for more than one quarter of IKEA’s total revenues. growing markets) and has since expanded into Russia . such a strategy can be risky. means a blunter focus. Notes George Bradley.” he explains. responds to such criticism by referring to the company’s mission. Florida. Because many consumers in those regions have relatively low purchasing power. firms lacked the technology to facilitate this type of data management.” Some American customers. and if consumers in the target segment do not migrate to other segments that the focuser does not serve. The company opened its first U. He does not feel a need to show constant profits and.” Goran Carstedt. these data flows permit supply-chain management. If you don’t want contemporary. We decided TV is something we can own. In particular. During the 1990s. says. however. So it takes a certain Customer to buy it. focus can be sustained if competitors cannot overcome barriers that prevent imitation of the focus strategy.. is an example of the cost focus strategy. knockdown furniture.” Of course. Notes Jeff Young. Ford’s $6 billion world car-known as the Mercury Mystique and Ford Contour in the United States and the Mondeo in Europe-was developed using an international communications network linking computer workstations of designers and engineers on three continents. in computers. And remember. a firm’s differentiation focus advantage is sustainable only if competitors cannot define the segment even more narrowly. president of IKEA North America. act local” philosophy with ease. Second. A foeuser does not try to be all things to all people: Competitors may diminish their advantage by trying to satisfy the needs of a broader market segment-a strategy that. IKEA’s London store has achieved annual sales growth of 20 percent.” To keep them coming back. If you’re in this business. networks. One of the hallmarks of the virtual corporation will be the production of virtual products-products that practically exist before they-are manufactured. and manufacture of virtual products are stored in the minds of cooperating teams. IKEA is spending between $25 million and $35 million on advertising to get its mesSage across. the stores offer a smaller selection of goods. you’d better take a look. a cost focus is sustainable if a firm’s competitors are defining their target markets more broadly. the Swedish furniture company described in the chapter introduction. Several factors determine whether focus can be sustained as a source of competitive advantage. “[IKEAJ has really made a splash They’re going to capture their niche in every city they go into. today. Although it is a common industry practice to rely heavily on newspaper and radio advertising.” He believes that investment in Russia would not have been possible if the company had been a public company. our prices would go up.

IKEA furniture is sold in kit form ready to assemble. so too have the horizons of competitors. 1780—1831 Yom Kriege. pharmaceuticals. competition works to drive down the rate of return on invested capital toward the rate that would be earned in the economist’s perfectly’ competitive industry. and the competitive rivalry between current members of the industry. there are five forces influencing competition in an industry (see Figure 10-1): FIGURES 10 –1 Forces influencing Competition in an industry Threat of new entrants Bargaining Power of Suppliers Rivalry among existing competitors Bargaining power of Buyers Threat of substitute products or services The threat of new entrants. The store exteriors are painted bright blue and yellow-Sweden’s national colors. Rates of return below this competitive rate will result in withdrawal from the industry and a decline in the levels of activity and competition. IKEA is focused on the young customer or the young at heart: The core market is the customer with a limited budget who appreciates IKEA’s product line. delivery. assembled and ready to use product. IKEA’s success in crossing borders has been instrumental in changing furniture retailing from a multidomestic industry to a global one. as evidenced by the recent fortunes of some 11. In industries such as soft drinks. Because IKEA knows the needs and wants of this market segment. IKEA offers rock-bottom prices. a limited number of display items. Porter of Harvard University. the bargaining power of suppliers. Industry Analysis Forces Influencing Competition 2. There they find boxes containing the furniture in kit form.625. first generally then at the decisive point. and prices. At IKEA. .” (1832-1837) The following lesson aims to make the student understand the following topics: 1. you make a purchase and take it with you. and higher prices.5 billion in annual sales in 1998-1999. and a baby care room. the company’s success reflects founder Ingvar Kamprad’s vision of selling a wide range of stylish. IKEA’s furniture bears names such as “Ivar” and “Sten” instead of model numbers. In any industry. a favorable combination of the five forces has resulted in attractive returns for competitors. displays. Competitive Innovation and Strategic Intent From its home base in Sweden. and cosmetics. . the bargaining power of buyers.2 © Copy Right: Rai University 165 . In a traditional furniture store. According to Michael E. and developing and maintaining competitive advantage. Rates of return that are greater than this so-called competitive rate will stimulate an inflow of capital either from new entrants or from existing competitors making additional investment. after browsing and writing down the names of desired items. a leading theorist of competitive strategy. and a catalog from which to order. Book III.INTERNATIONAL MARKETING LESSON 17: COMPETITIVE ANALYSIS AND STRATEGY “The best strategy is always to be very strong. Shoppers view furniture on the main floor in scores of realistic settings arranged throughout cavernous showrooms. Global Competition and National Competitive Advantage 3. a grocery store called the Swede Shop. The lower level of a typical IKEA store also contains a restaurant. the threat of substitute products or services. one of the cornerstones of IKEA’s strategy is having customers take their purchases home in their own vehicles and assemble the furniture themselves. Strategic Positions 5. The traditional store offers salespersons or consultants. shopping is very much a selfservice activity. The bottom line for IKEA is that the company creates a unique value for customers: Instead of salespersons. IKEA offers informative displays and product information for everything it sells. understanding competitive advantage at both the industry and national levels. competitor analysis. Competitive Advantage and Strategic Models 4. The reality in almost every industry today-including home furnishings-is global competition This fact of life puts an organization under increasing pressure to master techniques for conducting industry analysis. Industry Analysis Forces Influencing Competition A useful way of gaining insight into the nature of competition is through industry analysis. At IKEA. IKEA has become the world’s largest furniture retailer doing $8. Chapter XI. The essence of global marketing strategy is in successfully relating the strengths of an organization to its environment. shoppers pick up their furniture on the lower level. there is no more imperative and no simpler law for strategy than to keep the forces concentrated. “Assembly of Forces in Space. pressure from any of the forces can reduce or limit profitability. However. In a departure from standard industry practice. it has been successful in serving customers not only in Sweden where the company was founded but also globally.” -CARL VON CLAUSE\VITZ. Traditional furniture is assembled and ready to use. you place an order and wait weeks or months for delivery. With 150 stores in 29 countries. an industry can be defined as a group of firms that produce products that are close substitutes for each other. As the horizons of marketers have expanded from domestic to global markets. a supervised play area for children. functional home furnishings at prices so low that the majority of people can afford to buy them. As a working definition.

high prices may induce buyers to switch to the substitute. whether the result of physical product attributes or effective marketing communication. “raise the bar” for would-be industry entrants For example. Searle used brinkmanship especially price cuts-to deter competitors from entering the low-calorie artificial sweetener market as Nutrasweet’s patents expired. domestic or foreign. used the term brinkmanship to describe a recommended approach for deterring competitive entry. Searle’s policy of brinkmanship was an effective competitive response to the threat of new entrants.competitors in the personal computer (PC) and semiconductor industries. The enormous capital requirements in such industries as pharmaceuticals. managers at Monsanto’s G. Porter describes eight major sources of barriers to entry. D. a desire to gain market share and position. resulting in reduced industry profitability. Komatsu was given two years of protection by the Japanese government. field sales and service. When existing firms in an industry achieve significant economies of scale. Searle’s tactic of deep price cuts on Nutrasweet had “the sole intent of chasing competitors out of the marketplace. The decision to become a new entrant in an industry is often accompanied by a major commitment of resources. for example. seeking market entry. for example. In many cases. and upper-middle income countries that have been designated as national industries by their respective governments. their expectations about the rewards of entry will certainly be affected. Microsoft’s huge installed base of PC operating systems and applications presents a formidable entry barrier. G.625. and government subsidies are several examples. In some cases the government will restrict competitive entry. If new entrants expect existing competitors to respond strongly to entry. In telecommunications. A fifth barrier to entry is access to distribution channels. very often. Japan’s postwar industrialization strategy was based on a policy of preserving and protecting national industries in their. marketing. G. Searle subsidiary achieved differentiation an. is the extent of a product’s perceived uniqueness-in other words. results from the wide range of products it produces that feature gasoline-powered engines. A fourth barrier to entry are one-time switching costs caused by the need to change suppliers and products. complained that “it is a bloody fight and everybody’s losing money. or unavailable. Access to raw materials. China is following a policy today of requiring foreign investors in many industries to join with local partners in their Chinese investments. The availability of substitute products places limits on the prices market leaders can charge in an industry. was a weal local company when Caterpillar announced its interest in entering the Japanese market. Komatsu. 166 Government policy is frequently a major entry barrier. former president of the Boston Consulting Group. Bruce Henderson. expensive to enter. A discussion of each of the five forces follows. This is true in a number of industries. whether or not it is a commodity. D. A potential competitor’s belief that entry into an industry or market will be an unpleasant experience may serve as a strong deterrent. ancillary equipment costs. New players push prices downward and squeeze margins. or a barrier designed to discriminate against foreign firms-it applies to any firm. D. lowermiddle.2 INTERNATIONAL MARKETING © Copy Right: Rai University . The perceived cost to customers of switching to a new competitor’s product may present an insurmountable obstacle preventing industry newcomers from achieving success. For example. Threat of New Entrants New entrants to an industry bring new capacity. economies of scale. a marketing manager at Holland Sweetener Company. For a segment of the book 11. for example. refers to the decline in per unit product costs as the absolute volume of production per period increases. Finally. advertising. To the extent that channels are full. Honda’s efficiency at engine R&D. development and growth phases. Capital is required not only for manufacturing facilities (fixed capital) but also for financing R&D. proof that G. new approaches to serving customer needs. (Nutrasweet managers] go for the last kilo even if they have to give the product away. it becomes difficult for potential new entrants to be competitive. For example. High levels of product differentiation and brand loyalty. the cost of entry is substantially increased because a new entrant must create and establish new channels. A third entry barrier relates to capital requirements. Most foreign companies have encountered this barrier in Japan. chemicals. and so on. it is also applicable to research and development (R&D). the presence or absence of which determines the extent of the threat of new industry entrants. Brinkmanship occurs when industry leaders convince potential competitors that any market entry effort will be countered with vigorous and unpleasant responses. several European producers have already abandoned the business. and inventories (working capital). the cost of evaluating a new source.d erected a barrier in the artificial sweetener industry by insisting that the Nutrasweet logo and brand mark-a red-andwhite swirl-appear on diet soft-drink cans and bottles. Although the concept of scale economies is frequently associated with manufacturing. This is not a so-called non tariff barrier. customer credit. it is not possible to invest in China without a partner. favorable locations. and mineral extraction present formidable entry barriers. expected competitor response can be a major entry barrier. Kuipers. mainframe computers. the Japanese companies in these protected industries have gone on to become major world competitors in their industries.” In Kuipers’s view. general administration. The first barrier. Systse T.” In fact. especially those in the low. These might include retraining. At the end of 1989. Established firms may also enjoy cost advantages independent of the scale economies that present barriers to entry. Threat of Substitute Products A second force influencing competition in an industry is the threat of substitute products. Product differentiation. and other business functions. Customers could now order from millions of books and have them delivered to their doors in a matter of days. D. and. the second major entry barrier. Barnes & Noble watched the upstart Amazon create a new product the on-line bookstore. and today it is the number-two earthmoving equipment company in the world.

An example is the detergent industry. and greater market interest in functional design and engineering innovations. it creates instability and negatively influences the attractiveness of the industry. First Volkswagen and then Japanese automakers such as Nissan and © Copy Right: Rai University 167 . market conditions were much different than in America: less space. it can be a positive force.) The automobile industry has also become’ fiercely competitive on a global basis. as standard or undifferentiated-buyers are likely to bargain hard for low prices because many supplier firms can meet their needs. small cars meant smaller unit profits. Amazon. Once the industry accumulates excess capacity. expanded its product line into CDs and videos.2 companies to innovate and/or rationalize costs. Amazon. Usually. 4. Several factors influence supplier bargaining power: 1. To the extent that it drives down prices and. customers are forced to pay the higher prices.market. the virtual bookstore is an extremely successful replacement for a traditional format. product positioning. The willingness and ability of suppliers to develop their own products and brand names if they are unable to get satisfactory terms from industry buyers will influence their power. Based on recent changes in the way business is done around the world. Manufacturers to design and manufacture highquality. Under this formula.S. high taxes on engine displacement and on fuel. gasoline prices were significantly raised. and served 17 million customers in 160 countries. 3. Unilever. therefore. customers for smaller cars-a classic case of ethnocentrism and marketing myopia. 4. Firms with high strategic stakes in achieving success in an industry generally are destabilizing because they may be willing to accept unreasonably low profit margins to establish themselves. global competition is a critical factor affecting success.6 billion. global brand-name muscle and marketing skills have become the sources of global competitive advantage that overwhelm local competition in market after market.com is growing at the rate of 169 percent while Barnes & Noble is only growing at 16 percent. Again. global companies have virtually excluded all other companies from their markets. Rivalry manifests itself in price competition. 2. hold position. Bargaining Power of Suppliers If suppliers have enough leverage over industry firms. they can raise prices high enough to significantly influence the profitability of the industry. therefore. the buyers’ best interests are served if they can drive down profitability in the supplier industry. (See discussion under “Related and Supporting Industries” later in this chapter. To the extent that rivalry among firms forces 11. Several factors can create intense rivalry: 1. Meanwhile. In some industries. firms focus on market share and how it can be gained at the expense of others. Rivalry Among Competitors Rivalry among firms refers to all the actions taken by firms in the industry to improve their positions and gain advantage over each other. 3. there is downward pressure on prices and profitability. A lack of differentiation or an absence of switching costs encourages buyers to treat the products or services as commodities and shop for the best prices. The following are conditions under which buyers can exert power over suppliers: 1. local bookstores with only a few thousand books and a Starbucks Coffee facility were not necessary. the suppliers will have considerable leverage over buyers. and Procter & Gamble (P&G)-dominate an increasing number of detergent markets worldwide. Part of the reason for the initial success of foreign automakers in the United States was the reluctance or inability of US. Bargaining Power of Buyers The ultimate aim of industrial customers is to pay the lowest possible price to obtain the products or services that they use as inputs. 4. inexpensive small cars The resistance of B. When the buyer is willing to achieve backward vertical integration. When the supplier’s products are viewed as commodities-that is. Therefore US. which controls the price of oil. advertising battles. Since there is no alternative. relationships and motivation that distant rivals cannot match. Suppliers will also enjoy bargaining power if their business is not threatened by alternative products. 3. 2. Since it started in 1995.625. Suppliers will have the advantage if they are large and relatively few in number. When the suppliers’ products or services are important inputs to user firms. the drive to fill capacity will push prices-and profitability-down. manufacturers resisted the growing preference of US. A good example of the bargaining power of suppliers is OPEC. In industry after industry. the higher the list price. Michael Porter urges global companies not to lose sight of “Local things-knowledge. Industries characterized by high fixed costs are always under pressure to keep production at full capacity to cover the fixed costs. or carry switching costs. diversified into pet and drug supplies to name but two areas. including Latin America and the Pacific Rim. Apparently. Once an industry becomes mature. or expand. In the 1970s and again in 2000. In Europe and Japan. and attempts at differentiation. Because many companies can make a quality detergent. When they purchase in such large quantities that supplier firms depend on the buyers’ business for survival. profitability. are highly differentiated. European and Japanese manufacturers’ product lines have always included cars smaller than those made in the United States. in which three companiesColgate.com has grown to over $1. 2. When the supplier industry’s products or services represent a significant portion of the buying firms’ costs. INTERNATIONAL MARKETING Global Competition and National Competitive Advantage An inevitable consequence of the expansion of global marketing activity is the growth of competition on a global basis. manufacturers was based on the economics of car production: the bigger the car. At one point in time gasoline prices at the pumps had increased about 33 percent in six months.

performance. for example. the skills possessed by these workers. The social effects of these influences often prompt political responses that destabilize the business environment. minerals. Any cost advantage will disappear if wages increase and production moves to Firm Strategy. detergent prices have fallen and quality has risen as a result of global competition. quality. how. and other natural resources determine a country’s physical resources. credit cards. If smaller. and infrastructure. The diamond shapes the environment in which firms compete in their global industries.Toyota discovered a growing demand for their cars in the US. and price characteristics they wanted. It is noteworthy that many significant innovations and technical advances-including radial tires. capital. if so. the presence or absence of particular attributes in individual countries influences industry development. demand conditions. INTERNATIONAL MARKETING Factor Conditions The phrase factor conditions refers to a country’s endowment of resources. Market. The effect of global competition has been highly beneficial to consumers around the world. Knowledge Resources The availability within a nation of a significant population with scientific. Porter. for example. and luxury cars? Why are so’ many leading pharmaceutical. as well as transportation costs. which has since spread to all industries. quantity. What is true for automobiles in the United States is true for every product class around the world. the cost of manual labor is rapidly becoming a smaller and smaller factor. companies that have not mastered the art and science of lean manufacturing are no longer in the auto business. Indeed. Governments want to know whether they should intervene in the business environment and. Structure. and Rivalry Factor conditions Demand Conditions Related and Supporting Industries Determinants of national advantage Another country. In the two examples citeddetergents and automobiles consumers have benefited. Factor resources may have been created or inherited and are divided into five categories: human. it is unlikely that Detroit manufacturers would have provided a comparable product as quickly. labor averages about one eighth or less of total costs. Businesses want to understand how to choose locations for their activities that give them a competitive advantage. chemicals. Today. The following section addresses a number of questions. wage levels. Airbags are a no table exception. and fuel injection-also came from Europe and Japan. technical. water. in most manufacturing industries of the developed world. However. Countries with a plentiful supply of low-wage labor have an obvious advantage in the current production of labor-intensive products. software. Porter describes these attributes factor conditions. The presence of these factors is usually a function of the educational orientation 168 © Copy Right: Rai University 11. foreign companies have provided consumers with the automobile products. In Central America. Lean manufacturing was invented in Japan and gave the Japanese automobile companies a knockout advantage in world markets: lower costs and higher quality. and cost of land. are strategic considerations.base for specific industries? Why. this company takes customers away from domestic suppliers. chocolate/confectionery. Human Resources The quantity of workers available. A country’s size and location are also included in this category because proximity to markets and sources of supply. In the United States. The downside of global competition is its impact on the producers of goods and services. knowledge. anti lock brakes. Physical Resources The availability. lower-priced imported cars had not been available.625. however. and firm structure and rivalry-in terms of a national diamond.2 . and the overall work ethic of the workforce together constitute a nation’s human resource factors. physical. lean manufacturing has replaced mass production in the same way that mass production replaced craft production. the jobs and livelihoods of the domestic supplier’s employees are threatened. Presently. Global competition expands the range of products and increases the likelihood that consumers will get what they want. and movies? Why is Germany the home of so many world leaders in printing presses. Why is a particular nation a good home. Another major innovation in the auto industry. is the revolutionary innovation of lean manufacturing first introduced at Toyota. Unless the domestic supplier can create new values and find new customers. and market-related knowledge means a nation is endowed with knowledge resources. and for the same reasons: It raised the bar on quality and dramatically reduced costs. low wage countries may be at disadvantage when it comes to the production of sophisticated products requiring highly skilled workers capable of working without extensive supervision. These factors are obviously important advantages or disadvantages to industries dependent on natural resources. This radically different way of designing and building an automobile dramatically reduced costs and increased quality. related and supporting industry. is the United States the home base for the leading competitors in PCs. and trading companies located in Switzerland? Why are the world leaders in consumer electronics home based in Japan? According to Michael E. Both business and government policy makers are trying to better understand the factors that make a specific nation a better (or worse) place for a company in a specific industry. When a company offers consumers in other countries a better product at a lower price.

Rapid home-market growth is another incentive to invest in and adopt new technologies faster. tax laws. such as natural resources and labor. such as a suitable highway system. where rapid homemarket growth provided the incentive for Japanese firms to invest heavily in modern. Market saturation is especially important if it coincides with rapid growth in foreign markets. More sophisticated industries are more dependent on advanced infrastructures for success. The means by which a nation’s products and services are pushed or pulled into foreign countries is the third aspect of demand conditions. especially if it anticipates international demand. and communications system. Equally important is early market saturation. (2) the size and pattern of growth of home demand. Generalized Versus Specialized Factors Another categorization of factors differentiates between generalized factors. Capital Resources Countries vary in the availability. For example. The composition of home demand determines how firms perceive. comfortable markets.2 © Copy Right: Rai University . The globalization of world capital markets is changing the manner in which capital is deployed. and apprenticeship programs. gives local firms the advantage of getting established in an industry sooner than foreign rivals. and specialized factors. developed an industrial ceramics industry that leads the world in innovation. which lead to sustainable competitive advantage. Advanced factors. Scarcity of raw materials may motivate firms to develop new materials. Global firms will increasingly be following capital to the best places rather than operating in nations where capital is scarce or expensive. For example. This advantage is enhanced when home buyers pressure the nation’s firms to innovate quickly and frequently. reflects or anticipates world demand. example. than is available to foreign rivals. Japan. and respond to buyer needs. For example. The size and pattern of growth of home demand are important only if the composition of the home demand is sophisticated and anticipates foreign demand. The firms with the low cost of capital can keep their prices low and force the firms paying high costs to either accept low returns on investment or leave the industry. For. absence of suitable labor may force firms to Develop forms of mechanization that give the nation’s firms an advantage. Three characteristics of home demand are particularly important to the creation of competitive advantage: (1) the composition of home demand. Investors can now send their capital to nations or markets with the best risk/ return profile. amount. interpret. for some 150 years. INTERNATIONAL MARKETING Demand Conditions The nature of home-market demand conditions for the firm’s or industry’s products and services is important because it determines the rate and nature of improvement and innovation by the firms in the nation. 1his factor’ relates directly to Germany’s leadership in chemicals. If the home demand accurately reflects or anticipates foreign demand. Firms paying high capital costs are frequently unable to stay in a market in which the competition comes from a nation with low capital costs. however. at an earlier time. such as highly educated personnel and modem data communications infrastructure. The nation’s savings rate. which puts pressure on a company to expand into international markets and innovate. the 11. the existence of a labor force of trained artisans offers Italy a basis of sustained competitive advantage in the Italian tile industry. such as focused educational systems. cost. the competitive advantage of the Japanese robotics industry is fueled by extensive university robotics courses and programs that’ graduate robotics skilled trainees of the highest caliber. automated facilities. The basis for advantage is the fact that the nation’s firms can stay ahead of the market when firms are more sensitive to and more responsive to home demand and when that demand. and government deficits all affect the availability of capital. For example. and (3) the means by which a nation’s home demand pulls the nation’s products and services into foreign markets. Germany has been home to top university chemistry programs. and types of capital available to the country’s industries. Competitive advantage may also be created indirectly by nations that have selective factor disadvantages.625. These factors are important to success in sophisticated products and services and to doing business in sophisticated markets. or advanced factors. faced with scarce raw materials. Generalized factors are precedents required for competitive advantage. cheap labor is a transient national advantage that erodes as a nation’s economy improves and average national income increases relative to other countries. The advantage to industries with low capital costs versus those located in nations with relatively high costs is sometimes decisive. The issue here is whether a nation’s people and businesses go abroad and then demand the nation’s 169 Basic Versus Advanced Factors Factors can be further classified as either basic factors. The best example of this is Japan. Basic factors do not lead to sustainable international competitive advantage. advanced scientific journals. in turn. Large home markets offer opportunities to achieve economies of scale and learning while dealing with familiar.of the society as well as the number of research facilities and universities-both government and private—operating in the country. Infrastructure Resources Infrastructure includes a nation’s banking system. are scarcer and require sustained investment. sustainable advantage requires the development of specialized factors. There is less apprehension about investing in large scale production facilities and expensive R&D programs when the home market is sufficient to absorb the increased capacity. health care system. Competitive advantage can be achieved when the home demand sets the quality standard and gives local firms a better picture of buyer needs. efficient facilities. Early home demand. and if the firms do not become content with serving the home market. transportation system. interest rates. the existence of huge-scale facilities and programs will be an advantage in global competition. These are the factors that either train firms for world-class competition or fail to adequately prepare them to compete in the global marketplace. as well as the availability and cost of using these systems. and to build large.

England.S. auto companies set up operations in foreign countries. improve existing ones. and prestige in the home market. These opportunities may not be available to foreign firms. chemicals. amply demonstrates. It is the contact and coordination with the suppliers that allow the firm the opportunity to structure the value chain so that linkages with suppliers are optimized. price. Japanese parts suppliers followed their customers.S.products and services in those second countries. The same is true for the Japanese auto industry. Those involved in the relationships begin to demand the products and services of the recognized leaders. tend to look like. The absence of significant domestic rivalry will create complacency in the home firms and eventually cause them to become noncompetitive in the world markets. They have relocated their headquarters for bottle water 170 © Copy Right: Rai University .S. organizational skills. This provided an impetus for Caterpillar to establish foreign operations. These centers of competitive advantage are known as clusters. Of special importance are those conditions that lead to initial and continuing incentives to invest and innovate and to continuing competition in increasingly sophisticated markets. As noted earlier in the discussion of the forces shaping industry competition. develop new technologies. and improve quality and service. which constitute a critical mass.S. banks are allowed to take equity stakes in the companies to which they loan money and provide other profitable banking services. scientific. and quality. Sales of U. For example. These very mobile investors drive managers to operate with a short-term focus on quarterly and annual results. This fluid capital market structure will provide funds for new growth industries and rapidly expanding markets in which there are expectations of early returns. new entrants bring new 11. such as chemicals and precision machinery. capital markets do not encourage more mature industries in which return on investment is lower and patient searching for innovations is required. engineering firms skyrocketed after World War II. for example. company structure and management style tend to be hierarchical.S. and strategic perspectives create advantages and disadvantages for firms competing in different types of industries. when overseas demand for the services of U. home appliances and household furniture in Germany. and be run like. or research. It is also important that there be a fairly high rate of new business formations to create new competitors and safeguard against the older companies becoming comfortable with their market positions and products and services. the U. they are likely to demand the products and services with which they became familiar while abroad.S. For example. These banks take a longer-term view than stock markets and are less concerned about short-term results. other industries. Opportunities for sharing between computer hardware manufacturers and software developers provide a clear example of clusters. the majority of shares of U. strong domestic rivalry will push firms to seek i international markets to support expansions in scale and R&D investments. Managers tend to come from technical backgrounds and to be most successful when dealing with industries that demand highly disciplined structures. to France and moved the Rowntree Mackintosh confectionery division to York. Multinational companies such as Nestle are incorporating this concept when establishing locations for their various businesses. It is not the inputs themselves that give advantage. Eventually. Similar advantages accrue when there are internationally competitive and related industries in a nation that coordinate and share value chain activities. These investors will buy and sell shares to reduce risk and increase return rather than get involved in an individual company’s operations. Clusters are geographic concentrations of interconnected companies and institutions in a particular field. those firms in turn established demand for U.625. INTERNATIONAL MARKETING Firm Strategy. Internationally competitive supplier industries provide inputs to downstream industries that are likely to be internationally competitive in terms of technological innovation. Italian firms. On the other hand. small family bus